Revolving Credit : Fund Finds Novel Way to Add to the Redevelopment Kitty
Mark Bidner, vice president of California Fiberloft Inc., couldn’t believe it when he heard that someone had purchased his $1-million business loan.
“Who would buy a loan at 4.5%?” he asked.
When the state bundled the Fiberloft loan with others totaling $6.1 million, it found a willing buyer in a Minneapolis nonprofit whose primary purpose is to buy back business and housing loans in disadvantaged inner-city and rural neighborhoods.
The purchase of state loans by the Community Reinvestment Fund represents a novel way whereby declining economic development funds can be recycled to spur more small-business growth. By taking over 17 below-market-rate loans made previously by the California Integrated Waste Management Board, the fund essentially freed the money to be loaned again to more recycling businesses.
“It’s the first time that the state has done this in California for a non-housing loan,” said John Frith, a waste board spokesman. “It’s been looked at very closely by a lot of local redevelopment agencies who are thinking of following suit.”
The idea of creating a secondary market for economic development loans is the brainchild of Community Reinvestment Fund President Frank Altman, 43, who calls himself a “social entrepreneur.”
Altman was working for the state of Minnesota’s economic development department in 1988 when tightened federal restrictions began to narrow the flow of money to development projects and loan programs. He sought to find a way to release the money that had already come through the funding pipeline without having to resort to more taxpayer funds.
He hit upon the idea of creating a nonprofit corporation that would operate like mortgage companies that buy home loans from lending institutions. His corporation would concentrate on business start-up loans in the inner city and rural areas.
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Since 1989, the Community Reinvestment Fund has bought 650 loans totaling $27 million in nine Western and Midwestern states. About 60% are small-business loans and the rest are housing rehabilitation. Funding comes from CRF loan repayments, foundation grants and institutional investors, such as banks and pension funds, which buy bonds backed by loan assets from the CRF.
The default rate is less than 2% and the delinquency rate 1.5%, Altman said.
“It’s a model that can be replicated in many places,” Altman said. “The bottom line is more loans to small business than would be the case without the secondary market.”
Frith said the waste board sold its loans at a discount to CRF but benefited by getting paid back now--instead of waiting for the loans to mature--and by being able to lend the money to more companies.
Most of the 47 loans under the board’s Recycling Market Development Zone program went to small businesses that otherwise might have struggled to get conventional financing because they are using new technology or creating new products from recycled waste, Frith said.
For Fiberloft, the loan meant survival for the 58-employee Los Angeles manufacturing firm. The money enabled Fiberloft to shift from making padding for the shrinking Los Angeles furniture industry to manufacturing air-conditioning filters using recycled plastic bottles.
For Cathy Bump, vice president of Plastopan North America, an affiliate of Germany’s Plastopan, the $700,000 loan was an integral piece of the $5 million in start-up costs needed to get a plastic garbage cart factory running in South-Central Los Angeles with 40 employees.
And for Martyn Keats, owner of Marplast in Moorpark in Ventura County, the $200,000 loan enabled him to buy a $175,000 piece of equipment and hire six more workers to make toilet plungers using recycled milk jugs for the handles.
“Can you smell the milk?” Keats joked on a recent morning as he sniffed a handful of gray plastic pellets the size and shape of lentil beans.
As his workers bent to their manufacturing tasks, Keats explained that he couldn’t persuade banks to give him a loan. Now, with the waste board money, he expects to grow to $1.8 million in sales, six times the volume of his first year in business.
“If they’re good-quality loans and they get bundled and packaged and sold, it actually makes sense, I think, for the waste management board to get more funds available to do what they’re mandated to do,” he said.
Other California government agencies, cities and nonprofits could similarly benefit from CRF, Altman said. With field offices in Seattle and Grand Junction, Colo., CRF is considering opening a third office in California.
“Communities in California are harder-pressed for funds than other areas that we’ve been active in,” Altman said. “But California has historically been a state where a lot of innovation occurs. This would be a new way of approaching the capitalization of business lending programs.”
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How it Works
Minneapolis-based Community Reinvestment Fund has created a secondary market for economic redevelopment loans. Here’s how the process works:
Step 1: A government agency or nonprofit corporation makes below-market-rate loans to businesses.
Step 2: The least-risky loans are packaged together for sale.
Step 3: CRF buys the loan package at a discount--for example, 75 cents on the dolloar.
Step 4: the issuing agency receives payment from CFR and can then lend the money again to other businesses. Taxpayers or corporate contributors, the source of the loan funds, pay fewer dollars to keep the same amount of money available for lending.
Step 5: CRF is able to use the loans as collateral to issue bonds and buy more loan packages.
Step 6: The business owner’s loan terms remain unchanged; he or she simply writes the check to CRF instead of to the government agency.
