Page 145 - 1-Entrepreneurship and Local Economic Development by Norman Walzer (z-lib.org)

134 Deborah M. Markley

local bank and, thus, increasing the bank’s ability to lend to an entrepre-
neur.
Another innovation that can make access to capital from local banks eas-
ier for entrepreneurs is the Capital Access Program (CAP) concept. The
North Carolina Rural Economic Development Center (2006) has estab-
lished a CAP designed to expand the level of risk that participating banks
can accept in making loans to rural entrepreneurs. The program creates a
loan loss reserve that can be tapped by participating banks to cover losses
associated with making loans with greater risk to entrepreneurs. The loan
loss reserve is capitalized by fees charged to the borrower that are matched
by the program. In North Carolina, these matching funds have been pro-
vided by a state foundation and the Appalachian Regional Commission.
Even with a well-documented business plan and clear financial state-
ments, it is possible that a rural entrepreneur may still have difficulty ob-
taining a loan from a bank. Banking institutions are regulated and, as a re-
sult, are limited in terms of the risk they can accept on the loans that they
make. In some rural areas, community development financial institutions
(CDFIs) have been created to meet the capital needs of local entrepreneurs.
CDFIs are private financial institutions whose mission is community de-
velopment. These institutions focus on the “double bottom line”—eco-
nomic returns and positive community impacts. CDFIs may take a variety
of institutional forms, including community development banks, loan
funds, credit unions, microenterprise programs, and venture funds (CDFI
Coalition 2006). As such, these organizations may be important in meeting
the capital needs of entrepreneurs at various stages in the development of
an enterprise.
CDFIs and other community development organizations can also be
important sources of capital for entrepreneurs through their use of pub-
lic sources of funds such as the IRP. USDA’s IRP provides community or-
ganizations, including CDFIs, with a pool of long-term, low-interest
funds that can be reloaned to qualified borrowers in rural regions. This
source of public sector funds can be important to capitalizing the CDFIs
who, in turn, make the funds available to entrepreneurs for business de-
velopment.
CDFIs are important sources of operating capital to entrepreneurs for two
reasons. One, they can offer capital to entrepreneurs whose lack of collateral
or credit history limits their access to bank loans. The CDFI evaluates both
potential return from the loan and the value the entrepreneur’s business
brings to the community. For example, a CDFI may choose to lend to an en-
trepreneur who is bringing a grocery store to main street because the deal is
judged based on the positive potential returns to the entrepreneur (and the
CDFI) as well as the value the grocery store brings to the downtown area and
its benefit to low-income residents who may now shop locally.