Community-based revolving loan funds offer help to small companies and nonprofit organizations.

One of the best-kept secrets about small-business financing in the United States may be organizations known as revolving loan funds.

These community-based entities use public and private dollars to meet social and economic goals by making loans to small businesses and to nonprofit and community projects at below-market interest rates.

As the money is paid back, it is used to make other loans to other businesses or nonprofits.

In other words, the original grant or loan to the revolving fund is used over and over.

"I think that's a wise use of funds. You seed something once and that seed continues to work for you," says Linda Salmonson, administrator of a three-year-old revolving fund called Rural Electric Economic Development, Inc., (HEED) in Madison, S.D. The $10 million fund has made about 50 loans, 24 of them to small businesses.

Early last year, Arlis Hanson, owner of Ag Services, Inc., a soybean-processing company in Huffton, S.D., obtained a loan of $150,000 from REED. The package included an additional $50,000 from a revolving loan fund run by the Northeast Council of Governments, based in Aberdeen, S.D.

The funds enabled Ag Services to purchase equipment and inventory to further develop the production of soybean oil.

A Variety Of Purposes

Throughout the United States there are more than 7,500 revolving loan funds--or RLFs--controlling assets estimated at more than $8 billion, according to a study conducted last year by the Washington, D.C.-based Corporation for Enterprise Development. In a survey of RLFs in seven states, the organization found that the median RLF loan size was $40,000, the median interest rate was 6 percent, and the median repayment term was five years.

Generally, each RLF has its own purpose and targets its loans to businesses and projects that help fulfill its mission. One fund might focus on serving microbusinesses, for example, while another might seek to revitalize a distressed downtown area.

"Our purpose is to provide financing and help leverage private investment in small communities and rural areas," says Salmonson. "We want to participate in projects that create economic growth, lead to permanent jobs in rural areas, improve rural development capacity and infrastructure, and fill a gap, to some extent, that may not be being filled by private lending."