Volume 11; No. 1; Winter/Spring
Counting on Local Capital:
Evolution of the Revolving Loan Fund Industry
By Andrea Levere, Vice President, Corporation for Enterprise Development
and David Wingate, Finance Specialist, Washington State Department of
Community Trade and Economic Development
1996, the Corporation for En- terprise Development (CFED) has managed
the Counting on Local Capital initiative, a national research and policy
project designed to build knowledge about the size, lending performance,
and development impact of revolving loan funds (RLFs). The Counting on
Local Capital initiative enabled CFED to piece together the first comprehensive
picture of RLF capacity and performance on an industry-wide level.
The following article offers an overview of the Counting on Local Capital
research, including selected highlights from the Washington State RLF
Profile. In addition, the story of the Washington State Lenders Network
serves as an example of how people and organizations can unite to improve
the capacity and impact of a large, geographically-diverse network of
The State of the RLF Industry
It is a time of extraordinary opportunity for RLFs working in urban and
rural communities throughout the United States. The size of the industry
has doubled in the past five years, with RLFs now managing more than $8
billion in financial assets. Practitioners have reached new levels of
sophistication, demonstrated by their entry into new markets, design of
innovative loan products, and creation of new administrative and managerial
economies-of-scale. Revolving loan funds report repayment rates ranging
from 85% to 95%, evidence that small businesses and low-income borrowers
are reasonably good credit risks. Furthermore, links to private capital
markets are beginning to emerge, primarily through the sale of economic
development loans on the secondary market.
There remain several challenges facing the RLF industry. Despite individual
RLF success in working with small businesses, the field is highly fragmented,
with few incentives for organizing collectively to strengthen the industry.
The quality of data to document the performance of RLF portfolios is generally
inadequate, and suffers from a lack of standard performance measures and
common reporting formats. The size of the median RLF (at $500,000) is
too small to be financially sustainable. Furthermore, lending and management
capacity within RLFs continues to be highly uneven. This capacity-gap
stems in part from their origin: many RLFs are funded by a single public
agency with an interest in program outcomes, not organizational evolution.
As a result, few funders complement their capital investments with operating
funds which could support training and technical assistance services to
strengthen the capacity of RLFs.
Banks and RLFs
One of the most important findings from the Counting on Local Capital
initiative is that bank investment is the fastest growing source of capital
for RLFs. There are multiple factors responsible for this finding. Certainly,
the Community Reinvestment Act (CRA) is a major force in encouraging bank
investment in RLFs. However, while the CRA may be what motivates banks
initially, it is not necessarily what keeps them invested over time. Bankers
often view RLFs as institutions that create future customers and lending
markets by making start-up loans that commercial banks could not. In describing
bank support of the California Economic Development Lending Initiative,
a statewide RLF, Richard Hartnack, Vice Chairman of Union Bank of California,
expressed his perspective clearly: We in the banking industry, from small,
local banks to large statewide banks, have come together through CEDLI
to serve credit needs that individually none of us could have addressed.
What are RLFs?
Revolving loan funds (RLFs) are community-based financing organizations
that provide access to capital for individuals and communities underserved
by private financial institutions. They provide loans to local businesses
that cannot attract private financing, and then recycle the repayments
by relending the capital to other businesses. With a 25-year track record,
RLFs have proven to be a flexible and effective tool for promoting business
development, job creation, and economic self-sufficiency in low-income
The growth of the RLF industry in both size and financial sophistication
presents new opportunities for collaboration with banks. Commercial banks
are purchasing seasoned RLF loans as a strategy for enhancing their liquidity
without incurring the expense of securitization. RLF administrators are
purchasing portfolio management services from commercial banks to lower
operating costs and increase the sus-tainability of their funds. Commercial
lenders and RLFs are jointly developing training, technical assistance
and mentoring programs that strengthen the ability of small businesses
to survive the risky start-up stage and succeed in graduating to private
financial markets. Finally, as RLFs are beginning to address the need
to mobilize savings and build equity among low-income individuals and
communities, entirely new avenues of collaboration are emerging with savings
and investment vehicles.
Building the RLF Industry Across the United States In 1997, seven states
(including California and Washington) were selected through a national
competition as sites for comprehensive surveys of state RLFs. Working
in collaboration with economic development organizations, economic development
trade associations and private sector financial institutions in each state,
CFED surveyed the RLFs between November 1997 and May 1998. Findings from
the research were released in October 1998 at the National Counting on
Local Capital Institute. The final reports (RLF Profiles) provide the
first complete picture ever presented of the size, lending activities
and development impact of the RLFs in these states.
The following pages present highlights of the Washington State RLF
Profile. For copies of the full report or for profiles of other states,
please contact Linda Keeney at CFED, (202) 408-9788.
Ingredients for RLF Success
CFED has identified six strategies that outline
how the RLF industry can build upon its foundation to strengthen
performance and development impact.
RLFs should develop their own financial markets.
Counting on Local Capital revealed that there are both considerable
capital reserves within the industry and a significant demand for
additional capital. There is a clear opportunity for developing
statewide or regional financial intermediaries that could act as
private capital markets by pooling and allocating capital based
on market need and institutional performance.
RLFs should be designed and funded to be financially sustainable.
Counting on Local Capital identified that the median RLF size
of $500,000 was too small to be financially sustainable. A significant
number of RLFs lack a diversified capital base, with 43% relying
on only one or two funding sources. The industry should identify
minimum loan fund size and key efficiencies of scale that are required
to diversify risk and operate on a sustainable basis.
RLFs should strengthen their role as product innovators for underserved
The mission of RLFs is to offer loan products that fill gaps in
the private capital markets. The dramatic and ongoing changes in
the financial services industry have enormous implications for the
nature of these capital gaps. As a core competency of their institutions,
RLFs need to build capacity in order to analyze and design new products
that meet these changing market needs.
RLFs should invest for performance.
Strong institutional performance requires investments in human
capacity and organizational systems. Many RLFs lack the basic infrastructure
necessary to support performance, such as common performance measures,
high quality operating data, access to training and technical assistance,
and operating funds for organizational investments. The industry
should develop a comprehensive database that allows RLFs to benchmark
themselves against their peers, and should provide financial incentives
that support RLFs in their efforts to improve performance.
|RLFs must improve how they demonstrate impact.
Impact measures for the industry are largely funder-driven, and most
funders dont agree on key definitions. Yet Counting on Local Capital
discovered that when RLFs take impact measurement seriously, the results
are impressive. The industry must come to agreement on common impact
measures and invest in the capacity to report them.
State and Federal policy should build RLFs as institutions.
State and Federal agencies are the primary funders of RLFs, and
their policies and management practices have a major effect on RLF
performance and sustainability. Thus, these agencies must support
the effort of practitioners to build the industry by:
- developing common reporting forms;
- allowing the reallocation of capital to meet changing market
- supporting efforts to pool RLF capital and connect to private
capital markets; and,
- providing operating funds for market development and capacity-building.
RLF Evolution in Action
The Washington State Lenders Network
CFEDs Counting on Local Capital initiative provided the
platform from which the WSLN leadership constructed a five-year
action plan to address the capacity and equity needs of Washington
States revolving loan funds. The plan integrates a number of the
components identified as critical to the long-term success of Washingtons
forty-one RLFs. The plan presents the following key objectives:
- Create an efficient delivery system for technical assistance
and best practices;
- Produce quarterly workshops which will bring nationally recognized
trainers and RLF practitioners to the Northwest;
- Offer electronic (Internet) networking, information exchange
and learning opportunities to overcome the geographic barriers
of Washington State;
- Continue the industry research and data collection services
begun though the Counting on Local Capital project. This will
provide impact information for practitioners, policymakers and
funders, and will help identify best practices throughout the
State; ‘ Become a regional intermediary and investment manager
for RLFs; provide operating equity and debt capital which will
help stabilize and expand RLF industry;
- Initiate research to reduce expensive RLF operating costs by
aggregating demand and increasing buying power (e.g. standardized
loan documentation, legal services, bonding, insurance, auditors,
employee benefits, etc.); and,
- Become self-sustaining within five years from revenues generated
through planned activities. The plan is separated into two phases
beginning in 1999. Phase I will last two-to-three years and will
- WSLN organizational development (staffing and membership structure);
- Implementation of technical assistance, training, data collection
and electronic networking programs; and,
- Potential membership expansion into Oregon and Idaho.
In addition, RLF best practice criteria will be developed as
a means of qualifying members for WSLN pass-through funding which
will be implemented during Phase II. Phase II will begin in year
three or four, and will implement the WSLN intermediary function
as a conduit of loans and investment capital for member RLFs. The
intermediary functions will serve the capital needs of member RLFs
and will generate revenue through which WSLN can become self-sustaining.
Access to Capital
During the first two years of the plan, the intermediary capacity
of WSLN will be tested through the initiation of participation loans
with local RLFs. Both ∆liquidity and ∆origination participations
are anticipated. The WSLN is looking for funds to purchase 49% (or
less) of existing RLF loans which will provide additional lending
capital for under-funded RLFs with strong loan demand. Washington
States Development Loan Fund is also available to participate with
RLFs in larger loan transactions.
The State Development Loan Fund will share finder and/or loan
fees with the WSLN and the local originating RLF. This will prepare
both WSLN and member RLFs for more sophisticated secondary-market
transactions. The goal is that WSLN will become a CDFI intermediary
by the third year, and will initiate three other ∆conduit of funds
programs: 1) Operating Capital Fund, 2) Equity Capital Fund and
3) Loan/Debt Capital Fund. These programs will focus initially on
smaller RLFs to help them stabilize their balance sheets and reach
a sustainable level of operations. It will also help expand mature
How Can Financial Institutions Participate?
Plans for bank participation have not yet been finalized. However,
proposed options include:
- Help in funding and locating partners for the WSLN Liquidity
- Provision of CRA, community development and commercial lending
staff to local RLFs;
- Participation in the WSLN planning process and service on the
board of directors;
- Identification of resources for local RLFs;
- Participation in long distance/Internet learning and ∆best practice
- Identification and referral of potential deals.
The Washington State Lenders Network
WSLN was formed as a trade organization in 1993 to represent
the interests of revolving loan funds in Washington State. To date, its
primary roles have been sponsorship of training seminars and the production
of a quarterly newsletter. WSLN is currently managed by a seven member
board of directors that has over eighty years of collective experience
in banking and economic development finance. The implementation of the
five-year plan will move WSLN into a new era of organizational growth
and value-added services to its RLF members.
For more information about Washington State Lenders
Network and its five-year plan, contact:
Tani Allen (WSLN Western Washington co-chair), executive
director, The Lending Network, (360) 748-2114. firstname.lastname@example.org
Tom Didomenico, (WSLN Eastern Washington Co-Chair),
manager of the Benton-Franklin Economic Development District Regional
Revolving Fund and the Columbia Regional Economic Development Trust, (509)
David Wingate, finance specialist, Washington State
Community Trade and Economic Development Department, (509) 738-4400. email@example.com
Corporation for Enterprise
CFED is a private, nonprofit organization that has specialized
in economic development policy and practice for 20 years. Its mission
is to foster widely shared and sustainable economic well being. It promotes
asset-building strategies, primarily in low-income and distressed communities,
that bring together practice, public policy, and private markets in new
and effective ways. CFED supports its public, private, and nonprofit sector
clients through policy design, analysis, and advocacy; demonstration and
project management; consulting; training; technical assistance; research;
and publications. CFED is headquartered in Washington, D.C., with site
offices in San Francisco, California and Durham, North Carolina.
About the Authors
|Andrea Levere is the vice president of the Corporation
for Enterprise Development (CFED) in Washington, D.C. Ms. Levere directs
CFEDs work in the area of development finance, business development
and training, small business finance, and non-profit financial management.
She currently directs Counting on Local Capital, a research and policy
project funded by the Ford Foundation to document the size, activities
and impact of the revolving loan fund (RLF) industry nationwide. Prior
to joining CFED, Ms. Levere was a director with the National Development
Council (NDC) for nine years. At NDC, she was a lead trainer for the
Economic Development Finance Certification Program. Ms. Levere received
a B.A. from Brown University and a M.P.P.M. from the Yale School of
||Dave Wingate has over 25 years experience in banking,
commercial finance and rural economic development in the private and
public sectors, including Seattle First National Bank, SAFECO Commercial
Credit Co., Inc, the National Consumer Cooperative, and United Security
Bank, a small, rural, community-owned bank. For the last four years,
Mr. Wingate has worked for the Washington State Department of Community,
Trade and Economic Development as an economic development finance
coordinator. His territory covers seven counties in Northeastern Washington.
Mr. Wingate helps small businesses access capital where jobs are created
or retained, primarily in timber dependent, high-unemployment communities.