Why It Matters
Federal revolving loan funds can expand access to financing for underserved businesses, but their long-term viability depends on balancing economic development goals with financial sustainability.
Federally funded economic development revolving loan funds (ED-RLFs) are designed to make loans to small businesses and underserved markets through a self-replenishing structure that can reduce the need for annual appropriations or federal credit subsidies, according to an updated Congressional Research Service (CRS) report. However, ED-RLFs are not automatically self-sustaining: Loan losses, operating costs, program regulations, and uneven demand can erode their capital base and require recapitalization or additional outside funding.
Congress faces trade-offs when weighing federal support for ED-RLFs, including capital needs, social targeting goals, risk management and whether fund terms generate enough revenue to cover losses and expenses.
The Big Picture
Capital for an ED-RLF may come from government agencies, foundations or private financial markets, with federal programs providing grants or loans to capitalize the fund. Repayment of principal, interest and fees can replenish the fund so future loans can be made without continuing subsidies.
ED-RLFs are often designed to target specific industries, geographic areas or distressed communities, or to address unmet borrower needs through products such as micro-loans or gap financing. ED-RLFs may generate direct benefits, including jobs created or retained and businesses expanded or started, as well as indirect benefits from infrastructure or community development projects.
Several federal programs support ED-RLFs under distinct terms:
- The Small Business Administration (SBA) Microloan Program requires intermediaries to provide a nonfederal, nonborrowed contribution equal to at least 15% of the SBA loan amount to capitalize their revolving fund. Intermediaries may make microloans of up to $50,000 to eligible small businesses.
- The U.S. Department of Agriculture's Intermediary Relending Program provides loans to intermediaries at a fixed 1% interest rate. Program funds may finance no more than 75% of an ultimate recipient's eligible project cost.
- The U.S. Department of Housing and Urban Development's Community Development Block Grant program may fund ED-RLFs, with administration subject to federal program requirements and each grantee's Consolidated Plan.
Federally supported funds may face program constraints, including interest-rate requirements, and high-performing funds may need recapitalization when they maintain an active borrower base. A June evaluation of the U.S. Economic Development Administration's RLF program by the Urban Institute noted that evolving financial products have expanded business financing options, creating potential competition for ED-RLF borrowers.
The Bottom Line
Interest rates and fees must be sufficient to cover potential loan losses, administrative expenses, and inflation if revolving loan funds are to remain financially sustainable. The report is descriptive rather than a recommendation to expand, reduce, or restructure ED-RLFs. It identifies trade-offs Congress faces when weighing federal support: capital needs, targeting and social goals, risk management, and whether fund terms generate enough revenue to cover costs.
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