PaydayNow: Revolving Loan Funds & Development Finance

A Revolving loan fund (RLF) is an instrument for financing gaps that are typically used to finance the growth and development of small-scale businesses. It’s a self-replenishing fund of funds, which makes use of principal and interest payments from old loans to make new loans. While most RLFs are for local businesses, a few focus on certain areas, such as health and minority business development and environmental clean-up. A revolving fund can provide an incredibly flexible source of capital that can be utilized together with other conventional sources. In most cases, it is the case that the RLF acts as an intermediary between the amount the borrower can obtain from the private market and the amount required to establish or sustain a company. For instance, a lender might be able to obtain 60-80 percent of financing for projects through other sources.( )

Qualitative RLFs offer credit at the market rate or attractive and competitive rates. Several RLF studies have proven that the ability to access capital and flexibility in terms and collateral is more important for customers with lower interest rates. RLF programs must be based on sound interest rates and not viewed as easy or free sources of financing. RLFs should be able to provide a sufficient annual interest return that they can provide funds for loan allocations in the future. With attractive rates and flexible terms, an RLF allows the ability to access new sources of financing for the borrower while making it less risky for the participating institutions.

The most common applications for RLF loans are:

  • Capital for operating
  • Acquisition of buildings and land
  • New construction
  • Building renovations and facades
  • Improvements to property and landscape
  • Equipment and machinery

Loan Characteristics

The loan terms are contingent upon the purpose of the funds. Loans used to fund working capital, as an example can range between 3 and 5 years, whereas loans for equipment last for lasting up to 10 years. Likewise, real estate loans could be between 15 and 20 years. The conditions must be set according to the duration of the use of the asset being financed.

The loan amounts vary from modest ($1,000 up to 10,000) and up to moderate ($25,000 or $75,000) and higher ($100,000 to $250,000 and higher) amounts available if an applicant has secured a significant amount via a private lender.

Capitalizing a Revolving Loan Fund

Capitalization or initial funding of a revolving loan fund is usually the combination of public sources including local, state, and federal government, as well as private sources like the financial institutions and philanthropic groups. Capitalization funds are typically equivalent to grants and are not required to be returned.

The majority of revolving loan funds contain at minimum one local source of public capitalization, in addition to other sources. If capitalization is purely local it is possible that the RLF could have more ability to lend, as federal and state involvement tend to impose restrictions that may not be appropriate for local business requirements.

According to Local and state governments usually make use of one or more of these to capitalize on an RLF. Examples include set asides for taxes general obligation bonds direct appropriations from the state legislature as well as annual dues from municipalities or counties participating in the RLF and the funds derived by the lottery system of the state.

It is the federal government that is a frequent source of capitalization. Communities can apply for funds through government agencies such as the United States Department of Agriculture (via the Rural Economic and Community Development Administration), Housing and Urban Development (via Community Development Block Grants) as well as of course, the Department of Commerce (via the Economic Development Administration).

Standards and Results

While RLFs can take on projects with higher risk, borrowers are subject to the standard requirements of financial management in the security of loans. Before a loan can be granted an organization or prospective business typically submits the following documents:

  • Business plan
  • Management experience and business knowledge
  • Financial statements and credit history
  • Enough collateral to pay back the bank as well as RLF financing
  • Additional personal or corporate guarantees for the project
  • Cash flow projections

As an instrument for public investment the revolving loan funds is likely to yield public goods, specifically projects that contribute to economic development and revitalization of communities. Therefore, the borrower must meet specific performance indicators set by loan administrators, such as:

  • The number and nature of jobs that are created or kept
  • Revenue from taxes to increase
  • Private financing for public investment
  • Benefits for low- and moderate-income citizens, from ownership of a business to employment opportunities


Urban Redevelopment Authority of Pittsburgh

The Urban Redevelopment Authority of Pittsburgh manages various Revolving Loan Fund Programs through The Center for Innovation and Entrepreneurship (CIE). These RLFs can be used as financing solutions for gap needs to finance the development of commercial properties as well as small and medium-sized business development. CIE programs are used in conjunction with private finance to help leverage funds needed for capital to assist companies to grow and expand. CIE RLFs comprise:

  • Micro-Enterprise Loan Program
  • Pittsburgh Business Growth Fund
  • Pittsburgh Entrepreneur Fund
  • Business Energy Savings Program
  • Pittsburgh Enterprise Zone Revolving Loan Fund
  • Urban Development Fund
  • New Markets Tax Credit Loan Fund

CIE programs are mostly funded through Federal Community Development Block Grants or by funds provided by the Pennsylvania Department of Community and Economic Development. RLFs are the key to the effectiveness of the CIE since they give the possibility of lending dollars many times. Between 2014 and 2016 the CIE provided 69 loans to support more than $51 million of total project costs and created 559 jobs.

Oregon Business Development Fund

The Oregon Business Development Fund (ODF) is a state-level Revolving Loan Fund managed by Business Oregon to provide capital to Oregon for businesses based in Oregon. This program allows funds to be used to purchase the purchase of land, building machines, and other perpetual working capital. These loans are fixed-rate with terms that are tied to the use duration of the asset being that is being financed. Businesses that participate in this program must be able to create or maintain jobs. They must be part of a trade-sector company in production, processing, or distribution. This program is geared towards small-scale and rural enterprises with less than 100 employees.

The OBDF was initially capitalized by the state of Oregon Lottery Funds as well as the EDA RLF grant. The subsequent capitalization events have included Oregon Lottery, General Fund, and SSBCI profits. As of July 31, 2017, the program was able to hold over $35 million of capitalization in the current period and the maximal loan amount of $1 million.

EDA RLF Program

The EDA Revolving Loan Fund Grant Program The grant program assists communities in obtaining grants to help them build communities to build a Revolving Loan Fund. In the Economic Adjustment Assistance Program, EDA regional offices provide competitive grants to local governments and state governments, as well as colleges of higher learning, both public and private non-profit organizations, and EDA-approved Economic Development District organizations as well as Indian tribes to establish Revolving loan funds (RLFs).

The EDA’s RLF recipient is then able to disburse funds through the RLF to provide loans at rates of interest that are lower than market rates to small companies or those that cannot take out loans for capital. Once the loans have been repaid by the grantee, it uses the interest to pay for administrative costs. It will add the principal and interest payments to the capital base of the RLF for new loans. If it is well managed, an RLF award is actively making loans to eligible companies and organizations, can continue to rotate funds, and doesn’t have a date for its termination. In November of 2017, there were more than 520 EDA-funded RLFs which equates to an aggregate capital of 824 million. A revolving loan fund (RLF) is a gap financing measure primarily used for the development and expansion of small businesses. It is a self-replenishing pool of money, utilizing interest and principal payments on old loans to issue new ones. While the majority of RLFs support local businesses, some target specific areas such as healthcare, minority business development, and environmental cleanup.