Editor’s note: This is the first of a two-part series on the performance of the EDC’s Small Business Loan Fund and a related micro-loan fund.
Jobs are the primary objective of the R.I. Economic Development Corporation’s Small Business Loan Fund, says EDC Deputy Director J. Michael Saul.
“At the end of the day, I don’t care how many metrics you want, take 10, take three – jobs, jobs, jobs … it’s all about jobs,” Saul told Providence Business News.
Yet the agency at best has only an incomplete picture of the jobs its primary loan fund has created or maintained over the years because it doesn’t track and tabulate that information once loans are awarded.
And despite many successes, the loan fund has also had its share of misses. Its failure rate on loans awarded since 2005, when the agency created a micro-loan fund within the larger fund for small businesses, is about 19.5 percent, nearly double the current charge-off rate for Bank Rhode Island and other leading commercial banks involved in small-business loans.
Still, EDC officials believe the loan fund has been a success. And, in a state desperate for job growth, they want it expanded with an additional $5 million federal earmark. A proposal to add another $5 million to the loan fund as part of a larger economic-development general revenue bond, which had been discussed with legislative leaders and the governor, was recently removed from consideration by EDC Executive Director Keith W. Stokes. It would have represented the first state money committed to the loan fund.
“You know you’re a successful program if you lend out $13 million [the fund’s initial capitalization when it was started in 1986], and collect back $13 million, and do it four times over 24 years,” Saul said, defending the fund’s performance. “A lot of capital went out, a lot of credit got extended.
“When credit gets extended, it’s either associated with a business start or business expansion, and with that, comes jobs,” he said.
Replenishing the loan fund, he explained, would continue a crucial secondary financing source for small businesses.
“We have very few private equity lenders” in the state, Saul said. “We have no mezzanine players. We have two subordinated loan funds – ours, and the Business Development Company. We have no alternative lenders, and we have no nouveau lenders – someone who will lend to [businesses with] soft balance sheets. This is where we play; this is where this fund plays, so we have this major gap here.”
Yet equally important for economic-development agencies as they struggle to obtain new financing, says venture capitalist Michael Gurau, president of Clear Innovation Partners in Freeport, Maine, is whether the old-style, economic-development model many still follow is the right one for the 21st century. “When compiling statistics, jobs are always created, none are destroyed,” he said. “Many old economic-development entities are going through agonizing funding crises. The taxpayer rightly wants to know: ‘What do I get for this money, and what measurement are you guys offering us?’ ”
From January 2005 through January 2010, EDC statistics claim that loans totaling $16.7 million have created 869 new jobs – and retained 2,047 jobs.
EDC officials say the figures are based upon the point in time when the loans were made – both for new jobs created and jobs retained. Many of the job numbers are based on projections made by companies in their loan application. But no follow-up computations have been made in the last five years, EDC officials acknowledge.
Companies in Rhode Island that receive Small Business Loan Fund loans are asked once a year to update the number of people employed, said EDC officials.
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