 State CDBG Loans -- An Effective Business
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For over 20 years, the Community Development Block Grant (CDBG) program has been a vital source of flexible economic development support for State and local governments. A new report from HUD's Office of Policy Development and Research, A Study of State CDBG Economic Development Loans, examines a CDBG-backed loan program that States have used since 1981 to make loans available to for-profit businesses for startup, expansion, relocation, or job retention activities. This report uses a representative sample of 82 loans made in fiscal year 1988 to assess loan success and failure rates, factors that may have influenced those rates, and the usefulness of the loans in achieving economic development goals.
A notable 70 percent of the 5,110 jobs created by businesses in the study sample were held by low- or moderate-income persons, surpassing CDBG's statutory requirement of at least 51 percent. Furthermore, these much needed employment opportunities were not short term -- more than three-fourths of all jobs created by sample businesses remained intact 6 years later. Fifty-five percent of all loans in the sample are considered fully successful -- the assisted firms are still in existence, they are repaying their loans, and they have created the number of jobs promised. Seventy percent met two of the three criteria for success.
States have taken advantage of the flexibility of the CDBG program, offering interest rates and loan structures to meet specific needs. The average loan was almost $300,000, and with few exceptions, repayment was required in 15 years or less. Existing businesses received 39 percent of the loans in the sample, while new businesses received 28 percent and franchises/branches or relocations got 23 percent. Although over half of all assisted businesses were 3 years old or younger, one-quarter had been in operation for over 15 years. Manufacturing firms received the vast majority of loans (70 percent), perhaps because they are perceived as creating the most jobs per dollar and having the greatest influence over growth in other sectors of a local economy.
The study found that success or failure could not be definitively linked to particular characteristics of the businesses, loans, or overall financing packages. Assisted firms were more likely to succeed, however, when they were offered lower interest rates on their loans, obtained significant proportions of their financing from private sources, and were large projects, both in terms of total monetary resources and employment. CDBG loan size had no relationship to success or failure. Among business types, manufacturing firms were least likely to succeed.
Also more likely to fail than other types of businesses were those in which CDBG assistance was provided to help establish a new firm. Despite these greater risks, the study found many successes among manufacturing firms and startup ventures, and did not recommend any changes in the types of firms that might be eligible for a State CDBG loan.
This report complements HUD's recently released Federal Funds, Local Choices, which provides a comprehensive evaluation of the Community Development Block Grant program. Copies of A Study of the Success Rates of State CDBG Economic Development Loans are available from HUD USER for $4. Please contact HUD USER to obtain print copies.
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