Loan-guarantee program moving forward in budget

The state-supported Slater Technology Fund has provided financing for dozens of high-tech startups in the early stages of development over the years, but even the fund’s top executive acknowledges that’s not enough to get Rhode Island’s “knowledge economy” really rolling.
“The issue now is the need to get things to the next level,” said Richard G. Horan, Slater’s senior managing director.
That’s the thinking behind a new $125 million loan-guarantee program that appears headed for approval at the General Assembly. Dubbed the Job Creation Guaranty Program, it will cater to firms with “soft assets” that would typically struggle to obtain loan approvals because they lack typical fixed-asset collateral such as buildings and equipment.
Under the program, the state would agree to back loans and other types of financing – guaranteeing between 75 and 90 percent of each deal – to ease the concerns of lenders and investors where the only major asset is difficult-to-value intellectual property or software.
Keith W. Stokes, executive director of the R.I. Economic Development Corporation, said the idea is similar to the state’s Industrial Recreational Building Authority, a $60 million loan-guarantee program that focuses on more traditional businesses with fixed assets. The limit on that program was recently increased from $20 million.
Now the EDC and other business leaders have pushed to extend guarantees to high-tech, digital media and life science firms, particularly since what has been dubbed as the “knowledge economy” has become a greater focus of economic development efforts.
With state backing, “we can induce private-sector investment, which is what these companies need,” Stokes said. “And that can really be a growth catalyst for what we’re seeing as a very fast-growing software, engineering, digital media [sector].” Supporters of the $125 million program say it’s a response to what other states are doing to promote their own knowledge economies, particularly the Ocean State’s closest neighbors Massachusetts and Connecticut.
In testimony before the House Finance Committee earlier this month, Laurie White, president of the Greater Providence Chamber of Commerce, noted efforts in 11 other states, including Texas’ $200 million Emerging Technology Fund and Maryland’s plan to invest $1.3 billion over the next decade in the bioscience industry.
Closer to home, Massachusetts enacted the Life Sciences Initiative in 2008, offering $500 million worth of tax benefits and research grants over 10 years, and another $500 million to improve facilities and equipment for public universities that collaborate with the life sciences industry.
“We have heard from entrepreneurs about the need to create similar programs,” White told legislators. “They are asking the community for help in investing in their ideas and innovations.”
While few think Rhode Island’s existing programs are enough, they have had positive effects on the knowledge sector.
Life sciences company NABsys Inc., for example, was established in 2004 by a Brown physics professor after receiving a $225,000 loan from the Slater fund.
Last year, the firm – which is working on genome sequencing technology – received a $4 million round of funding from Providence-based early-stage venture capital firm Point Judith Capital.
But the state needs to boost its capacity for similar deals, state officials and business leaders say.
Right now, the state has the Slater Technology Fund – which receives a $2 million annual appropriation from the state, although state officials acknowledge that it’s underfunded – to seed tech-heavy startups, as well as the EDC’s Small Business Loan Fund to help companies that already have been rejected by traditional financial institutions. But those in the industry say the state lacks the concentration of high-tech funding sources that exists in Massachusetts.
Stokes said he fears that companies will get a start in Rhode Island, and then migrate to Massachusetts for later-stage funding.
Supporters say the loan guarantees would enable the state to help without an outlay of cash – at least not right now.
Stokes said the program would work like this: A medical device maker, for example, seeks a $5 million line of credit to purchase materials, but a bank is only willing to extend $1 million because of concerns about the emerging industry. That’s where the EDC could step in to guarantee between 75 and 90 percent of the financing, with preference given to companies looking to create permanent, full-time jobs that pay at least 50 percent more than minimum wage.
The EDC would charge the borrower underwriting fees based on the size and scope of the deal.
And the state would be on the hook for the money only if the company defaulted. In those cases, the EDC would seek an appropriate from the General Assembly but would also seek to take the assets of the defaulting company to cover the loss.
As of last week, the $125 million Job Creation Guaranty Program remained in the fiscal 2010 supplemental budget and appeared to have the support of the majority of legislators.
Horan, of the Slater fund, is all for the loan-guarantee program. “This program is definitely a step in the right direction,” he said. &#8226