Summary

Incubators often set up revolving loan funds to help clients meet their funding needs. A revolving loan fund is a pool of public- and private-sector funds that use interest and principal payments on existing loans to issue new ones. A flexible source of capital that can be used in combination with more conventional funding sources, RLFs help provide gap funding, purchase order finance or other capital for traditionally "unfundable" high-risk clients. However, developing and managing an internal loan fund can have many hidden costs. Incubator mangers share their experiences managing loan funds and help set parameters to guide the development and administration of new funds.

Revolving loan funds: How incubators establish and manage internal funds or network with others to serve client needs

by Bridget Lair

October 2011

Debt finance is the only viable funding option for many companies. They may finance their entire operation with debt or use it to build the company until they can access other types of funds. Even traditional debt finance may be out of reach for many incubator clients because their businesses are too new or they lack necessary collateral and experience required for a small business loan.

Incubator loan funds can help close that funding gap and help get start-ups off the ground, but these funds can be expensive and complicated to run. The trick is knowing when your incubator can best serve clients' needs through an internal loan fund and when it's better to assist them to access external resources.

Many incubators and other economic development organizations use a grant or long-term/low-cost loan to start, replenish and expand their loan funds. Often, an RLF provides a bridge between the amount a client can obtain on the private market and the amount needed to start or sustain a business.

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Keywords: Funding sources/fundraising – incubator, economic development, for-profit incubators, venture capital, In-house loan and equity financing program, Angel investors/network, capital access, staffing – incubator

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