EDC business loans run the gamut

Money from R.I. Economic Development Corporation’s Small Business Loan Fund is targeted at businesses which have been denied commercial credit – a business only needs a rejection letter from a bank to apply, according to EDC Deputy Director J. Michael Saul. That makes The Small Business Loan Fund, at least in design, a lender of last resort to small businesses.
That initial denial often is for what EDC officials call “gap” financing in the capital continuum. “If a company goes to the bank, and they have $2 million in financing, and they want another dollar … and the bank won’t give them that next dollar, and they get a denial on that, then they’re a candidate,” said Saul.
As Providence Business News reported in the first part of this series on June 14, the primary purpose of the fund is the creation of jobs, according to Saul. But, by its own admission, the economic-development agency does not track, tabulate or update its job creation and retention database beyond the initial company projections at the time of the loan, making any evaluation of the loan fund’s performance on job creation incomplete. Only about half of the companies which have received small-business loans respond to EDC’s request for updates on jobs, and that information remains in paper files, un-tabulated, according to EDC officials.
(The fund as of May 13 had only $500,000 available for lending and there is a request pending for an additional $5 million in federal money to replenish the fund. General Treasurer and Democratic gubernatorial candidate Frank T. Caprio earlier this month proposed adding $50 million to the loan fund, including the first state funding.)
And despite the fund’s stated focus on job growth, some discretion has been applied in handing out loans for “unique” circumstances. For instance, loans were approved for organizations with fire-code issues to install sprinkler systems – including the Smithfield Elks Club, $50,000; the Portuguese-American Citizens Club in Portsmouth, $20,000, and the Washington County Columbus Club in North Kingstown, $10,100, between March 2006 and January 2007.
“We assist small businesses,” explained Fred S. Hashway Jr., the EDC’s director of government affairs and policy. “You had unique circumstances; you had fire-code issues. These loans were well within the parameters of the board. We did the same kind of analysis they would do for any small business. And, we said two things: one, these folks have a need for money; and two, they can pay it back. Simple, that’s all.” And the loans are being paid back by the borrowers.
But it is unclear how much oversight of these and other loans has been exercised by the EDC’s board of directors.
Cheryl Merchant, president and CEO of Hope Global of Cumberland, served on the EDC board of directors during the time the loans for sprinkler systems were provided but recently told PBN she had no memory of them.
“Those clubs are not ringing a bell for me; I wasn’t at every single meeting. The EDC followed very specific, regimented policies about who can get the money and who can’t,” she said. The board of directors, she continued, had very little input in directing the policy. On loans up to $35,000, they can be made with staff approval, with two signatures – the Small Business Loan Fund administrator plus either the EDC director or deputy director, according to Melissa Chambers, senior communications manager at EDC. “Everything over $35,000 must go to the board for approval,” she said. Board members are briefed on smaller loans approved by staff, she said.
“Does this company fit or not fit with the policy?” Merchant said, explaining the parameters of the board’s decisions. No real evaluation of loans was done at the board level, she said.
In addition, between December 2005 and April 2006, EDC’s Small Business Loan Fund made five loans for a total of $320,000 to businesses that requested help for flood relief. They included: Aelectronic Bonding of Lincoln, Munroe Dairy of East Providence, Providence Bicycle in Providence, Crest Surfaces LLC, in Lincoln, and Lance Industries in Lincoln. More than $84,800 owed on the $100,000 loaned in March 2006 to Crest Surfaces was not repaid and later written off in February 2008.
Asked whether the EDC has a criteria beyond jobs through which it measures the effectiveness of its loans by loan amounts, Saul said that there was no need for such analysis.
“We try and provide a capital source to small businesses,” Saul said. “We don’t differentiate by loan amount. We manage and react to a given pipeline at a given point in time. If the mix of that pipeline is more large than small, so be it. That’s what we analyze, that’s what we evaluate, that’s what we underwrite, and that may be, in fact, what we approve.”
Asked whether the EDC has ever done a geographic sort of the loans to determine where the money is going, Sean Estin, EDC’s loan-portfolio manager stated, “We have no control over where the applications come from.” Saul concurred: “We market the program as broadly as possible. We reach out through all the chambers of commerce. We can only react to the pipeline we receive. It’s a statewide program, and we market the program statewide.”
There is, however, ongoing communication between the Small Business Loan Fund and the Business Development Company of Rhode Island to marshal limited resources to small businesses, said Peter Dorsey Jr., president of the Business Development Company, a private lending company founded in 1953 with seed money from banks to support small businesses.
Often, Dorsey continued, “there’s a situation where a company needs more money than either one of us wants to risk in a single deal. So we leverage both the public and private money that we have, we’re both in the deal, but with smaller exposure. We’re diversifying the risk; there are two sets of eyes on the underwriting and the credit.”
Among the companies that received financing from both the Small Business Loan Fund and the Business Development Company of Rhode Island are:
• Location Inc. of Woonsocket received $250,000 in September 2006 from the Small Business Loan Fund; it also received $250,000 from the Business Development Company.
• Benjamin Box of Providence received $75,000 in May 2005 from the Small Business Loan Fund; it also received $75,000 from the Business Development Company.
• A.J. Martin of Warwick received $250,000 in January 2007 from the Small Business Loan Fund; it also received $250,000 from the Business Development Company. • H.W. Ellis of Smithfield received $250,000 in January 2006 from the Small Business Loan Fund; it also received $250,000 from the Business Development Company.
• New Territories of North Kingstown received $300,000 in July 2006 from the Small Business Loan Fund; it also received $250,000 from the Business Development Company.
• New England Environmental Services of Cumberland received $200,000 in January 2005 from the Small Business Loan Fund; it also received $200,000 from the Business Development Company.
As for New England Environmental Services, which went out of business, resulting in almost the full amount from both entities being charged off, Dorsey said, “It wasn’t one of our successes. We roll the dice, and we’ve got to be right more than we’re wrong.”
One important difference between the two funds, one public (EDC), one private, Dorsey continued, is that for the Business Development Company, its loans tend to follow the footprint of the commercial banks that provide the seed money, so that the loans are more regional, rather than being focused on Rhode Island.
One of the success stories of the EDC’s Small Business Loan Fund is Andera Inc., of Providence, according to Meaghan Wims, a senior account executive with Duffy & Shanley Inc., who works as the public relations contact for EDC.
Andera also received loans and investments from the Slater Technology Fund, a state investment fund begun in 1997 to stimulate the creation of new, technology-based companies in Rhode Island, and the Business Development Company. “We received $750,000 in three different installments from Slater,” said Charlie Kroll, the CEO of Andera. In addition, Kroll said that his company also received financial support from the Providence Economic Development Partnership. “It was a four-legged stool.”
Andera has developed the software package which enables credit union and bank customers to sign up for accounts online. The company now has 380 customers, and its revenue grew in 2009 by 65 percent. The company employs more than 60 people today, with an average salary of $82,000. “We’re making a big commitment to this state, everything we need is here, and we’re not going anywhere,” he said.
According to Kroll, his company had been rejected by a bank, and the Business Development Company brought them over to EDC to apply for a loan from the Small Business Loan Fund. They received a $150,000 loan in June 2005. EDC statistics say that five jobs were created and 10 jobs were retained by the loan, but Kroll questioned whether there could be any direct correlation between the loan and attributing it to direct hires. “It would be better to look at the overall growth in the business as a result of the loan made,” he said.
Kroll supports the effort to obtain new capital to continue the operation of the Small Business Loan Fund. “It is the lender of last resort for promising young businesses,” he said.
Going forward, Kroll said, one change that the Small Business Loan Fund should consider making is to eliminate the requirement for personal guarantees for most loans made. “A lot of the companies that they are lending to are knowledge-economy companies without traditional assets. It’s very difficult for companies such as ours, when you have a public, shareholder-owned company, to get principals to agree to personal guarantees,” he said. Personal guarantees for 100 percent of the business can be a very controversial thing, Kroll continued. “I’d like to see if they could find a way to collateralize the loans without personal guarantees. As a lender of last resort, they’re fulfilling a civic function. I’ve seen the personal- loan guarantee actually be very harmful to businesses, as well as the people running them.”
Kroll says he’s suggested that the EDC be more creative in finding an alternative, such as putting a value on soft assets, like source codes.
Other loan recipients also have issues with personal guarantees, which are required for most loans. Bill Ostendorf, whose East Providence company, Creative Circle Advertising Solutions Inc., received $100,000 in financing July 2006 through the Small Business Loan Fund, said that the personal guarantees – a lien on his house and a life insurance policy – ended up creating great hardships for both himself and the company.
The loan was part of a package of money from Slater Technology Fund and EDC, according to Ostendorf, which matched private investment in the company.
Reflecting on his own experience, Ostendorf said that the EDC offers no real proactive tools to help companies that may be experiencing stress. “They’re not set up to deal with a company that is distressed and may need to suspend payments,” he said. Ostendorf said that his company, after some difficult times, has been able to right itself. “You’d think, if they were doing early startup money, there would be more focus on helping you through tough times.”
Unlike Andera or Creative Circle Advertising Solutions, Randal Spencer, president and CEO of Concordia Manufacturing LLC in Coventry, said that because of the company’s more traditional manufacturing assets, he did not need to provide any personal guarantees when the company received $500,000 in April 2008 from the Small Business Loan Fund. The loan helped underwrite the firm’s expansion in Warwick, spinning off a separate company, Concordia Medical, an innovative manufacturing facility producing specialty fiber-based medical implants and scaffolds for regenerative medicine.
The company, which employs between 15 and 20 people at its Warwick facility and another 25 to 30 at another subsidiary in Coventry, is a privately held, family-owned business begun in 1920.
“The financial support from the Small Business Loan Fund was very critical to our success,” Spencer said. “It enabled us to upgrade the facility and bring in the kind of equipment to move the medical business forward.”
The new facility, near the airport in Warwick, uses sophisticated clean rooms, strict humidity controls and pure, pharmaceutical-grade water in the manufacturing process. In the last three years, Concordia Medical’s revenue has quadrupled, Spencer said, declining to give a specific number.
“In today’s economic environment, it’s very hard for entrepreneurs to get financing. The EDC stepped in at a critical time for us; they’ve been excellent partners,” Spencer said. “Their expression of confidence helped me to bring in additional outside equity investors as well.” •