Economic development practitioners use a large array of finance tools both to expand capital availability for economic development and to fund specific projects or programs. These pages summarize the most commonly used and highest impact tools-our Top Ten List of Economic Development Finance Tools.

  1. Community Reinvestment Act, enacted in 1977, created an affirmative requirement for banks to meet the credit needs in all areas that they serve, including low and moderate-income neighborhoods. Over the past 20 years, CRA has grown in importance as community groups and political leaders have become more effective in using it to leverage lending commitments, regulators have expanded enforcement, and federal laws and regulations have increased standards. Under CRA, banks define their service area and its credit needs, establish credit products to serve these needs, and make special efforts to serve the needs of low and moderate-income communities. Regulators encourage banks to work with community organizations during this process to understand and address community credit needs. Federal regulators periodically review and rate bank compliance with the CRA with one of five ratings: Outstanding, High Satisfactory, Low Satisfactory, Needs to Improve, Substantial Noncompliance. A bank's CRA performance is considered by regulators when approving bank applications for establishing a new domestic branch, relocating a main office or branch, making changes in its charter, merging with or acquiring another banks, and other matters. In many cities, coalitions have successfully negotiated new and expanded bank lending programs and services for affordable housing, commercial real estate development and small business credit. For example, the Pittsburgh Community Reinvestment Group negotiated a 5-year $109 million lending program with Union National Bank as part of it's 1987 takeover of Integra Financial Corporation. After three years, UNB had extended $71 million in new loans within the Pittsburgh region's low and moderate-income neighborhoods, including $37 million in small business loans and $11 million in loans for non-residential real estate development.
  2. Small Business Administration (SBA) Loan Guarantees. The SBA 7(a) program provides individual loan guarantees of up to $750,000 on private bank or finance company loans for working capital and/or fixed assets. Guarantees are for up to 90% of the loan principal with interest rates up to prime + 2.75%. Loan terms can extend to 10 years on working capital loans and 25 years on fixed assets loans. In FY1995, the 7(a) program guaranteed $8.3 billion on 56,000 loans and had a portfolio of 140,517 guarantees that totaled $23.5 billion. The 7(a) program is the largest direct tool to help small businesses access capital and represents approximately 7% of outstanding bank loans by commercial and savings banks. The (7a) program allows lenders to provide longer terms loans (13 years for 7(a) loans vs. 3.3 years for non-guaranteed loans), lower their equity requirements, and serve more start-up and minority businesses (22.1% of 7(a) borrowers are start-ups versus 0.4% for non-guaranteed borrowers and minority-owned firms account for 13.5% of 7(a) borrowers versus 8.2% of firms receiving non-guaranteed loans).
  3. Revolving Loan Funds (RLFs) are primarily granted-funded programs that make loans to small businesses, typically for job creation purposes. Loan repayments are then recycled to make additional loans over time. RLFs are one of the oldest and most flexible development finance tools, since the size and purpose of the fund is easily adaptable to local needs and resources. More than 600 RLFs exist nationwide with over $1 billion in assets. The most common funding sources are federal Community Development Block Grants and federal Economic Development Administration grants.
  4. Tax Increment Financing (TIF) involves the garnering of increased tax revenues from new development to fund specific investments and projects. Since new development will generate additional taxes, usually property taxes, this revenue can be set aside for specific funding purposes. TIF often helps finance the project that will generate the new revenue by funding site or infrastructure investments needed to make the project feasible, e.g., site assembly, site preparation, and new public infrastructure. The tax revenue stream from future development is pledged and used to repay bonds whose proceeds pay for the required upfront sites improvements and infrastructure. Tax increment financing is authorized under state laws but typically entails a multi-step process that includes defining area or district in which it will apply, setting up an authority to oversee the District surveying conditions to demonstrate required conditions of blight, formulating a redevelopment plan for district and how TIF funds will be used, approval of the redevelopment plan, authorizing and issuing TIF bonds to fund needed improvements, completing site and infrastructure improvements, and finally completion of the new private development.
  5. Business Improvement Districts (BIDs) are special assessment districts focused on supporting, improving, and revitalizing a commercial area, usually a downtown, neighborhood business district, or other business center. A BID collects a special assessment from property owners and/or businesses in the district and uses this revenue to fund activities and investments that promote and improve the district. Activities can include public safety services, cleaning services, beautification efforts, promotion and marketing, special events, business recruitment & retention, and transportation. For examples: the Dallas BID funds a trolley to transport people from downtown to a nearby neighborhood retail district, Dayton's BID funds marketing and business recruitment, and Cleveland used a BID to funded security, maintenance, & collective marketing. BIDs also fund staff to organize, coordinate, plan and advocate for the business district and important projects. BIDs are authorized under state law and require a 1 to 2 year process to organize, plan for, and secure required approvals.
  6. Community Development Finance Institutions (CDFIs) are community-based development finance entities that serve a community development mission, often within a targeted geographic area. CDFIs has grown over past decade, supported by funding from social investors and a new federal program (the CDFI Fund). CDFIs include Community Development Loan Funds, Community Development Credit Unions, Microenterprise Funds, Community Development Venture Capital Funds, and in some case, commercial banks. Chicago's South Shore Bank is one of the oldest and best-known CDFIs. CDFIs are usually locally organized and controlled non-profit organizations that combine development services, e.g., training, technical assistance, and real estate development, with financing to further their mission. CDFIs tap investors concerned about the social impact of their investments (e.g., individuals, churches, foundations and financial institutions making CRA investments) as a major capital source. The CDFI Fund, within the US Treasury Department has certified over 300 CDFIs based on federal statutory requirements and provides financial assistance to CDFIs under 4 separate programs.
  7. Venture Capital (VC) Funds emerged as a new capital after World War II and have grown rapidly since 1980. Venture capital funds historically focused on equity financing for early-stage technology businesses, but have expanded to finance other high growth businesses. VC funds typically are organized as private investment partnerships that manage investment capital for pension funds, corporations, wealthy individuals, banks and insurance companies. Over 500 VC funds managed close to $50 billion and made annual investments of $13 billion in 1998. These funds, which provide equity for high-growth firms that need large early investments before becoming profitable, can generate large regional economic development impacts by financing the commercial development of new technologies and industries. The federal government has supported private venture capital formation since the 1950s with the Small Business Investment Company (SBIC) Program while many state governments support venture capital investing through their own public venture capital funds, pension funds, and tax incentives. Some regions and cities have also formed VC funds to advance economic development goals. Public sector VC funds rely on several sources of investment capital, including general obligation bonds, direct appropriations, dedicated revenues, federal grants, public pension funds, local corporate investments, and tax incentives to attract private investment.
  8. Bank Community Development Corporations (Bank CDCs) are a mechanism under which federal bank regulators allows banks to make higher risk investments than are allowed under "safe and sound" banking standards and/or undertake activities that banks are otherwise prohibited from doing. Bank CDCs have great flexibility in the type of financing or development that they undertake. Approved Bank CDC activities include high risk loans, equity investments in firms, real estate projects, financing entities or organizations, direct real estate development, consulting and technical assistance, and grants. A Bank CDC investment or activity must serve a public purpose by (1) addressing the needs of low and moderate income neighborhoods or government targeted redevelopment areas and (2) directly benefit low or moderate income persons or small businesses. To be approved by regulators, there must be community involvement in the Bank CDC and the sponsoring bank must devote significant resources to the CDC. Investment in a Bank CDCs is limited to 5% of a bank's capital and surplus while any single project or investment is limited to 2% of the bank's capital and surplus. Bank CDCs take many organizational forms, including a for-profit or non-profit subsidiary, a joint venture or partnership with a community-based organization or public agency, a multi-bank organization, and a division or business unit of the bank.
  9. Capital Access Program (CAP) is the most common loan guarantee program operated by state government. CAP uses a portfolio-based guarantee mechanism rather than individual loan guarantees. For loans originated under the CAP program, the borrower (or participating bank) pays a fee, usually 3 to 7% of the loan principal, which is matched by the CAP program. The fee and matching amount is deposited into a dedicated loan loss reserve at the participating bank. This reserve then covers any losses on CAP loans made by the member bank, with no additional recourse. Twenty states and two cities (New York and Akron) had CAP programs as of 1997 with 347 participating banks and $976 million in outstanding loans. Some states increase the CAP match for loan in distressed areas or loans to minority- and/or women-owned firms, providing an incentive to increase such lending. As indicated by higher loss rates (3.9% cumulative), modest loan size ($58,000) and a higher share of loans to start-ups (18% in MA, 15% in IL), CAP loans serve firms that would not otherwise receive bank loans. Best Practices for CAP programs include: active marketing to and enrollment of banks, significant funding of reserves with the capacity to expand them over time, using broad criteria for eligible loans with incentives to target lending to specific groups or areas.
  10. Asset Securitization is the process by which cash generating assets are pooled and packaged into investment securities. Asset securitization allows a lender to sell existing loans to raise new capital to finance more economic development projects or businesses. Asset securitization can be undertaken either directly by a lender whereby the lender transfers it loans to a separate entity that then sell securities backed by these loans or by an intermediary organization that buy loans from lenders and then packages them into securities. Asset securitization has been widely used in the private sector for home mortgage loans, car loans, credit card receivables, equipment leases, and commercial real estate mortgages. Interest in asset securitization by economic development and community development entities has grown with the emergence of intermediaries, such as the Minneapolis-based Community Reinvestment Fund, and the Economic Development Administration's recent demonstration effort in the securitization of economic development loans.

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