Community Dividend

Revolving loan funds: A source of capital in South Dakota

Revolving loan funds are a major source of capital for individuals who do not qualify for traditional financing.

Nicole Bennett | Community Affairs Analyst

Published August 1, 2000  | August 2000 issue

Business and community development require capital: capital to finance micro- and small business start-ups; to assist existing businesses with operating expenses, expansion efforts and new product development; and to support ongoing equity investment and venture capital funds. Revolving loan funds, or RLFs, are a major source of capital for individuals who do not qualify for traditional financing. RLFs provide financial and technical support to entrepreneurs, tribal members, farm families in transition and others seeking business assistance in rural areas.

To identify available capital and guide business development, South Dakota Rural Enterprise, Inc. (SDREI), the South Dakota Governor's Office of Economic Development and the South Dakota Rural Development Council collaborated on a survey of the state's RLF programs. The Corporation for Enterprise Development designed the survey and analyzed the data as part of its Counting on Local Capital project, funded by the Ford Foundation. The survey findings offer a unique look at South Dakota's RLFs and point to opportunities for their future growth and enhancement.

What is a revolving loan fund?

A revolving loan fund, or RLF, is a source of capital that provides loans for small business or community development projects.

RLFs are structured to use loan repayments to fund new loans. RLF capital comes from a variety of sources, including federal, state and local governments, as well as private banks, corporations, individual investors or foundations.

Often, RLF loans fill a project's "financing gap," which occurs when a business needs a lower interest rate or lacks the funds to meet conventional financing requirements.

South Dakota RLFs in profile

Sixty-nine organizations managing 84 loan funds in South Dakota responded to the survey. In general, these RLFs are fairly new, operate as nonprofit entities and rely on a variety of funding sources. Seventy-three percent opened for business within the last 10 years, and 74 percent are managed by nonprofit organizations. Survey respondents reported a total of $132.8 million in capital from approximately 160 funding sources.

The capital base is concentrated in the largest loan funds. The survey defines large RLFs as those with more than $250,000 in capital, and the 32 loan funds meeting this definition manage 96 percent of reported capital collectively. The remaining 52 RLFs are small, each managing less than $250,000 in capital, and together they control a mere 4 percent of reported resources.

South Dakota RLFs as a whole have lent $65.9 million. Because large loan funds are the most active lenders, they need additional capital to maintain their lending activity into the future. Large RLFs estimated needing an additional $33.9 million in total capital over the next two years.

Types of RLF organizations

Based on the survey findings, SDREI developed a profile that classifies South Dakota organizations operating RLFs into three main categories: innovators and market leaders, emerging institutions and RLFs as community accounts. These classifications focus on differences in size, staff, lending activity and service area. Understanding the specific needs associated with loan funds in each category will enable SDREI to enhance the availability and deployment of rural development capital through RLFs in South Dakota.

Innovators and market leaders

Organizations classified as innovators and market leaders manage between $1 million and $10 million in capital, employ professional staff that manage multiple programs and products, and serve a multicounty or statewide area. These organizations actively lend to a wide range of businesses with various financing needs.

Emerging institutions

Emerging institutions manage $250,000 to $1 million in capital, employ paid staff and serve large communities, counties and tribes. These organizations vary widely in level of performance and lending activity. Some of the most active RLFs fall into this category, while 30 percent of these organizations are completely inactive and reported making no loans in the six months prior to the survey.

RLFs as community accounts

These organizations manage very small loan funds, each with less than $250,000 in capital. They rely primarily on volunteer staff, demonstrate sporadic to inactive lending activity, possess limited technical capacity and limit their service area to a specific rural community or small town.

Strategic opportunities

For each type of RLF organization, SDREI has identified strategic opportunities. SDREI discovered that most RLFs classified as innovators and market leaders want to develop new products and services beyond fixed asset lending and borrower referrals. To that end, these organizations require new capitalization strategies and sources. Market leaders also would benefit from additional staff training and information on best practices for organizational design and product innovation.

According to SDREI, emerging institutions need to assess their mission and take steps to become market leaders or develop alternative strategies such as merging with other loan funds. Emerging institutions that lack professional staff and technical expertise may benefit from partnerships with large market leaders that have the capacity to support small growing funds. Several small RLFs in South Dakota already contract with large funds for operating assistance and support services. Like market-leading RLFs, emerging organizations need staff training and access to additional capital.

Small RLFs that operate like community accounts must identify and pursue strategies to reposition themselves as either active lenders or true community accounts. To become active lenders and realize economies of scale, small or inactive funds could be absorbed by other large funds or financial institutions. An alternative for small loan funds is to change focus, develop a mission of community building rather than business lending and collaborate with community partners or foundations to achieve that mission.

Whatever strategies they pursue, RLFs in South Dakota have an opportunity to meet far-reaching needs for capital and business assistance. The commitment of SDREI and a host of other community partners will guide these loan funds toward new and innovative approaches to rural community development.

For additional information, visit or call (605) 978-2804.