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Regional business loans mostly get repaid Charge-off amounts to an eighth of money lent by agency

About one of every eight dollars lent to local businesses by the Buffalo and Erie County Regional Development Corp. was never repaid, a new study of the agency's lending activity over the last 30 years found.

Officials from the Erie County Industrial Development Agency, which administers the loan fund, said the 12.7 percent of loan funds that have been written off is low, considering the financing typically is given to highly risky start-up or early-stage businesses and the region's sluggish economy.

"It's a very reasonable charge-off rate," said Alfred D. Culliton, the IDA's chief financial officer, noting it also meant that $7 of every $8 lent by the development agency has been repaid.

"It's not bank [loan performance rates], but it's not meant to be," Culliton said Monday. "We don't make loans unless there's a gap where others won't finance a project adequately."

The report was compiled at the request of Erie County Executive Chris Collins, who wanted to see a detailed analysis of how the loan fund was performing.

The report "validates what the RDC does," Collins said. "I think you'd expect a higher [charge-off] rate because the failure rate for new businesses is way above 13 percent."

The RDC loans typically make up only a modest portion of a project or a company's funding and include financing from banks and other entities that generally are in a more favorable position to be repaid if the business fails or enters bankruptcy. The agency's loans currently have a 4 percent interest rate and typically run for five- to seven-year terms.

Collins said the RDC loans can provide important funding for start-up businesses. "So many times, the hardest loan to get is your first loan," he said.

"I'm glad we did this study and we admit to the loan write-offs and we don't apologize for them," he said. "I view it as a positive."

The report found that slightly more than one-fifth of the 520 loans that the RDC has made since 1979 have been written off, at least partially, a rate that Culliton described as "very reasonable," given that much of the funding went to businesses that had yet to become established.

"Without this program, many, if not most, of these businesses over the last 30 years would not have received the level of financing they needed to establish themselves and/or grow," Culliton said.

The vast majority of the loans -- more than 84 percent -- went for working capital, which is one area where banks are often most reluctant to provide financing, especially for start-up companies, said Brian McMahon, the executive director of the New York State Economic Development Council in Albany.

"They're taking a greater risk than a conventional lender would take," he said, noting that the RDC's 30-year history also spans four recessions and lengthy periods where the local economy grew far slower than the country as a whole.

The loan fund, which started out with $11.1 million in funding from the federal government, Erie County and the City of Buffalo, has made a total of $88.1 million in loans during that 30-year period.

The average loan has been for a little more than $169,000, and have ranged in size from as $4,200 to as much as $2 million, through a 2007 loan to Perry's Ice Cream in Akron.

The worst performing loans went to companies that had won contracts but hadn't been able to get the bank financing needed to carry out the work. While the RDC made just six loans worth only $450,000 to those small companies, 60 percent of the borrowings were never repaid, the report found.

The second-highest loss rate came from the 51 loans that the agency has made to minority businesses, with 43.5 percent, or $1.8 million, of the $3.7 million lent out to those firms being charged off as uncollectable.

The RDC's program, established in 1997, to provide long-term capital for potentially high-growth start-up and early stage companies that weren't able to get conventional financing also produced a relatively high charge-off rate. In all, 12 of the 19 loans made by through the agency's Venture Strategic Loan Plan were never repaid at all, leading to a 27.8 percent net charge-off rate.

No other loan category had a charge-off rate of more than 16 percent. Fewer than 10 percent of the funds loaned to women's business entrepreneurs and under a 1993 program with local banks aimed at women and minority-owned businesses went unrepaid.

Collins said he has suggested linking start-up companies receiving RDC loans with experienced business mentors, such as through the University at Buffalo's Center for Entrepreneurial Leadership, to give those fledgling firms a readily available source of advice.


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