Program Overview
The purpose of the Economic Development Administration’s (EDA) Revolving Loan Fund (RLF) is to create jobs and to stimulate small business growth by assisting businesses whose projects will improve the local economy by creating or retaining jobs, increasing the tax base or promoting the general health, education, and welfare. The Economic Development Administration provides funds to intermediaries such as local economic development agencies, local government or community not-for-profits.
The EDA Revolving Loan Fund helps businesses to obtain financing primarily for hard assets (land, building, and equipment with a useful life of ten years or more). Under certain circumstances, the EDA RLF will finance working capital provided there is sufficient collateral to secure the loan.
Compared to other revolving loan funds, the EDA revolving loan program is one of the most difficult to qualify for. First of all you will need a denial letter from at least one lending institution to show the borrower is unable to obtain the funding required. Another drawback to this funding is the amount of money available. Most EDA funds are only able to lend up to 33% of the total project cost and some can lend up to 50%. A lending institution has to be involved in order to get EDA financing unlike the USDA IRP fund where several will fund a project without a lending institution. The maximum loan amount is typically up to $150,000 but there are programs that will do more or less. A job requirement is also typically tied to the amount of funding that is available as well.
Interest rates are set by the intermediary but are typically fixed between three and seven percent but are also seen both higher and lower and can be variable as well.
Repayment of these funds typically depends on the item being purchased but best case can be up to 20 years on real estate, 10 years on machinery and equipment and seven years for working capital but shorter terms are often seen and offered by intermediaries.
Collateral requirements will vary between intermediary but very are going to make a loan without some sort of security and will often require 100% or more collateralization. Collateral requirements may be less than one for a USDA IRP loan as EDA revolving funds are a grant to the intermediary and do not have to be repaid.
How it works
The intermediary will have an application form that is evaluated by a loan review committee. Expect to also include a business plan with three years of financial projections, personal financials and credit history along with the application.
A loan administrator will do an initial review and let you know if there is any additional information needed. Once you have a complete application, a loan review committee will review and meet to discuss whether to fund, decline or if additional supporting information will be required. Sometimes the loan review committee has to meet with the full board to get approval to make the loan.
Once a loan is approved a lien will typically be required on the assets being purchased or a purchase money security interest (PMSI) which gives the intermediary title of the equipment until the loan is paid off. Intermediaries may require receipts that the loan was spent on the items you requested in the application and some don’t. In addition a personal guarantee for the repayment of the loan is pretty standard.
The time frame from application to money disbursement averages between two and six months. Many of the intermediaries are volunteer driven and only meet at most once a month.
Case Study
A manufacturing client that made exercise equipment had faced some hard times after the recession starting in 2008. They weren’t fast enough to cut overhead as sales were falling and burned through their cash cushion until they met with us in 2012.
When the economy started to thaw for the client in 2012, customers had placed significant orders that could not be completely filled with the inventory on hand. A partial fill was out of the question so inventory had to be ordered to capture these sales. Since profits had been negative over the past few years the banks did not have confidence in making a loan to the client which meant the possibility of losing sales and possibly going out of business.
The client had equity in a warehouse so a state backed loan fund was interested in loaning 50% of the funds for the project. The EDA revolving loan fund was willing to loan the remaining 50%. The client used the funds to purchase inventory and ended up having the highest sales in the last five years.
Total funding of this project was three months.
Why get a EDA revolving loan?
EDA loans are harder to qualify for than the USDA IRP loans so I will tend to recommend these in extreme situations or if another funding source is already available. EDA loans will typically close faster than IRP loans due to a faster review process as EDA doesn’t have to concur.
Where to find a EDA revolving loan
Check with your local economic development agency, chamber of commerce or www.BusinessLoanFunds.com.