Cabinet
21 March 2011
Agenda Item No______10_______
THE NORTH NORFOLK COASTAL PATHFINDER REVOLVING LOAN FUND AND SMALL
BUSINESS GRANT FUND.
Summary:
Conclusion:
Recommendation:
This report sets out the background for the proposal of a revolving
loan fund and business grants scheme across the North Norfolk
Pathfinder area and seeks Cabinet approval to begin the tendering
process to engage an appropriately qualified organisation for the
administration of the scheme. The Cabinet is also asked to approve
the Small business grant proposal.
The North Norfolk Coastal Pathfinder Programme recognises the
problems faced by coastal communities threatened by coastal erosion
and this programme seeks to build on the successful business advice
project through establishing a loans and grant fund to support
business development in the Pathfinder area.
Cabinet is requested to approve the establishment of the Revolving
Loan Fund and subject to further legal advice on the mechanics of the
scheme, agree that the Council procure a Loan Fund Manager to
administer a fund in the manner outlined within the report.
Cabinet is requested to approve the creation of the Pathfinder
Business Grant fund which will be co-ordinated by the North Norfolk
Business Forum with ultimate responsibility for the approval of grant
applications resting with a grant panel as detailed in the report.
Cabinet member(s):
Ward(s) affected:
All
All
Jose Socao, Economic and Tourism Development Officer,
01263 516303, jose.socao@north-norfolk.gov.uk
Contact Officer, telephone number,
and e-mail:
1.
Introduction
1.1. This report sets out the background for the proposal of a revolving loan fund
and business grants scheme across the North Norfolk Pathfinder area and
seeks Cabinet approval to begin the tendering process to engage an
appropriately qualified organisation for the administration of the scheme.
The Cabinet is also asked to approve the Small business grant proposal.
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2.
21 March 2011
Background
2.1. Members will be aware that since the credit-crunch, bank lending to small
businesses fell at the fastest annual rate experienced for more than 40
years. Members will also be aware that since officially moving out of
recession, the UK financial condition, now known as the economic downturn,
continues to discourage bank lending to micro and very small businesses.
Whilst there are improving reports from certain major UK lenders about their
lending performance, it remains a fact, that in North Norfolk the banking
system does not currently provide the channels for financing small business
needs. It is also apparent that as we progress through recovery, the districts
businesses will require access to more loan capital to fuel growth. This is no
more evident than along the eastern coastal seaboard, where businesses
are doubly blighted, firstly through the loss of confidence in them by the
financial sector because of their vulnerability to coastal erosion, and
secondly because the size of these businesses and their weak working
capital position places them below the new level set for acceptable risk
taking.
2.2. As a result of this banks have simply closed down their supply of finance to
these very small businesses, including extensions to existing credit facilities,
new loans and bridging finance. Therefore it is important that NNDC should
consider finance options that will help assist our small businesses to trade
out of these harsh economic conditions. The bid for coastal pathfinder fund
submitted by the Council and approved by Defra included a proposal to
operate business support schemes subject to the development of detailed
proposals. This paper outlines the operation of a revolving loan fund and
small business grant scheme within the coastal pathfinder area.
2.3. The revolving loan fund (RLF) is a gap financing measure to be primarily
used for development and expansion of small businesses in the area which
otherwise can not access borrowing. It would be a self-replenishing pool of
money, utilising interest and principal payments on old loans to issue new
ones.
2.4. The RLF could issue loans at market or otherwise competitive and attractive
rates. However, it should be build on sound interest rate practices and not
perceived as free or easy sources of financing.
2.5. This support would provide a fund in which coastal businesses can apply to
receive a loan to adapt, improve or relocate their business. Eligible uses for
the loans would include:
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•
•
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Acquisition of land and buildings for relocation or expansion
New construction
Facade and building enhancement
Landscape and property improvements
Machinery and equipment
Purchase of materials to complete a major new order
Developing new markets, products or services (if revenue funds are available)
2.6. The grants scheme is a response from the successful Pathfinder Business
Advices Project and will provide assistance to those businesses who have
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21 March 2011
identified actions required to prepare their business for coastal change or to
assist in increasing the vibrancy of those businesses and the blighted coastal
areas.
3.
The Revolving Loan Fund
3.1. Loan Characteristics
3.1.1. The lending terms would be flexible and designed to respond to
customer need. Typically, the following terms would apply:
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•
Loans will be between £5,000 and £35,000
Loan repayment periods between six months and five years
A fixed rate of interest, at or below market rate, will be applied to the loan
(please see section 6)
A poor credit history or no credit history at all will NOT automatically exclude
a client from borrowing
Lack of security is not necessarily a barrier to lending.
Capital repayment holidays may be agreed, where appropriate.
Loans will not be permitted to businesses that are in arrears with their NonDomestic Rate payments
3.1.2. Durations would vary according to the use of funds. A loan used for
working capital, for instance, may range from 1 to 3 years, while loans
for equipment and real estate are up to 5 years.
3.2. Requirements for Loan Application
3.2.1. Before a loan is issued, a business would need to supply the following
documentation, these could have been prepared through the Pathfinder
business advice initiative:
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•
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Loan Application Form
Business plan
Business experience and management information
Credit history and financial statements
Cash flow projections.
3.2.2. As a public investment instrument, the loan funded projects are
expected to contribute to the local economic growth and community
revitalisation. Borrowers therefore, must be able to address performance
measures at the end of the loan term such as:
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Number and type of jobs created or retained
Private funding relative to public investment, and
Benefits to the community, from business ownership to job opportunities.
3.2.3. The loan facility would be longstanding and the benefits would reach
beyond the Pathfinder timescales. As the loans are repaid, further
business would be able to apply for the replenished fund. It may also be
possible to contribute further funds to the facility or attract other
contributors.
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21 March 2011
3.2.4. Once businesses who have completed the Pathfinder Business
Advice Initiative have had the opportunity to access the fund, should any
funding remain, the loan fund will be made available to other coastal
businesses.
3.3. Administration and Management of the Loan Fund
3.3.1. The fund will be managed by an independent fund manager procured
through a two-stage restricted procurement procedure (please see
Appendix F for Tender Evaluation Criteria). The successful contractor
will be required to demonstrate:
• Track record in delivering loans to businesses, particularly SMEs;
• A model for managing the fund that will deliver access in the Pathfinder area
and linkage with existing finance and support providers (please see Appendix
G for a sample loan procedure adapted from that of an existing loan model
being delivered in the region); and
• Value for money.
3.3.2. It is being proposed to invest £200,000 capital up front in the creation
of the fund from the Pathfinder funding. Should revenue funds be
available a percentage of the overall loan fund will be revenue which will
enable a wider applications for loans. In addition some revenue costs
will need to be contributed to support the delivery of the fund (estimated
cost will be around £15,000 per year over the first five years of the
contract, following which it would be hoped that the operation of the fund
would be self financing). However, the cost of delivering the fund will be
one of the key criteria for selecting the preferred supplier. Bidders will
also be required to provide a long term cash flow forecast, which
demonstrates how over time the revenue costs to NNDC will reduce as
the fund generates interest payments and potentially attracts additional
funding from the private sector.
3.3.3. Fees, capital repayments and interest payments from recipients of the
loans will go back into the fund and will be available to be reinvested.
The fund will therefore be revolving. Operating costs for the fund will be
kept to a minimum and will be met from the capital and revenue amounts
invested in the fund and through interest and capital repayments
generated by the lending activity. The fund will initially have a life of five
years with the option to extend this indefinitely. The loan fund will not be
expected to make money for the Council during and after its initial five
year period and if there is any increase on the fund, it would be
reinvested in the scheme.
3.3.4. It is envisaged that the bidders will be mostly Community
Development Finance Institutions (CDFIs). CDFIs are specialist
enterprises, often operating on a not-for-profit basis, which deliver
finance and other support services to enterprises and individuals.
Concerning enterprise lending, the CDFI sector focuses on businesses –
start-up and existing, for-profit and/or social enterprises – that cannot
obtain finance from the mainstream banking sector. CDFIs also often
have an explicit community development mission, for instance by
focussing their lending within disadvantaged areas and/or amongst
financially excluded groups. There are only three CDFIs in the East of
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21 March 2011
England region which include Foundation East, Norfolk and Waveney
Enterprise Service (NWES) and Women’s Employment Enterprise and
Training Unit (WEETU) but there are numerous CDFIs operating across
the UK (please see Appendix H for a list of CDFIs in the UK).
3.3.5. Anticipated outputs over the first five years of the fund include:
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Investment in over 20 businesses
A total of over £500,000 invested in the area through the loan fund,
contribution from the applicant businesses and other potential private funders
Approximately £20,000 per year can be expected from interest payments of
borrowers although this would be reinvested into the loan fund to offset
management costs or any losses to the fund.
3.4. Interest rates
3.4.1. The table below provides information on the average interest rate
charged by CDFIs, together with the average minimum and maximum
rates charged.
Average
interest
rate
Average
minimum
interest rate
Average
maximum
interest rate
Micro
enterprises
SMEs
11.79%
10.43%
13.56%
10.92%
10.31%
13.36%
Social
enterprises
Personal
lending
9.52%
7.57%
11.49%
24.39%
18.45%
28.64%
Market
segment
Base = 42 CDFIs (micro enterprises); 26 CDFIs (SMEs); 24 CDFIs (social enterprises); 14 CDFIs
(personal lending)
Source: Inside Out (2008/09)
3.4.2. Along with the criteria mentioned in paragraphs 5.1 and 5.2, the
projected interest rates to be charged will also be a key criterion for
selecting the preferred fund manager. Based on the above, anticipated
interest rates will be in the range of 10.31% to 13.56%.
4.
Pathfinder Business Grant Scheme
4.1. The business advice initiative which was launched in May 2010 has been
very successful with 90 businesses signed up and receiving business advice.
Through the scheme clear themes of further assistance have been
highlighted. It is the intention of the proposed grant scheme to meet some of
these needs and enable these businesses to build upon the advice they have
received.
4.2. The grant fund will total £90,000, of which £40,000 capital and will be
£50,000 revenue. The grants will be for a maximum of £5000 per business
unless there are exceptional circumstances. Businesses will be required to
contribute a total of 25% of the grant awarded. Grants will be available for
marketing, infrastructure improvements and for professional advice. It is
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21 March 2011
anticipated that many grants will enable businesses to begin to respond to
the coastal issues they face, or, will improve confidence and the appeal of
the coastal area (specifically the east of the district).
4.3. The scheme will be co-ordinated and advertised through the North Norfolk
Business Forum who have generated deep links with coastal businesses
through the Pathfinder Business Advice Project. The value of this coordination is £9,000 and will be monitored and administered under a Service
Level Agreement. The grant fund will be held by NNDC and the overall
decision as to which businesses receive grants will rest with a panel
comprising of an NNDC Councillor, member of the Economic Development
Team and member of the NNBF executive board. The grants will be judged
against stringent criteria.
5.
Financial Implications
5.1. The capital of £200,000 and revenue of £15,000 per year for a total cost of
£275,000 over a five year contract to administer and manage the loan fund
will be taken from the Further Business Support project budget allocation of
the North Norfolk Pathfinder programme.
5.2. The grants fund will be funded through the Pathfinder Further Business
Support Scheme to a total of £90,000 and £9,000 for co-ordination.
5.3. The costs for staff time that will be spent on procurement and monitoring of
the contract will be charged against the Pathfinder project management
budget.
6.
Legal Considerations
6.1. The District Council’s legal team are continuing to explore whether there are
any impediments to the Council delivering a loans scheme as proposed and
will seek further advice if necessary. The recommendation to Cabinet seeks
endorsement for the operation of a revolving loan fund in principle subject to
further advice from the legal team.
7.
Risks to the Council
7.1. The lending activities of CDFIs are inherently higher risk than banks.
However, the bad debt rate of CDFIs in the region is approximately 5% and
provision has been made for this in the model developed. If any borrower
defaults, the financial risks will be contained within the loan fund as operated
by the CDFI partner.
8.
Sustainability
8.1. There are no sustainability issues arising from this report.
9.
Equality and Diversity
9.1. There are no equality and diversity issues arising from this report.
10. Recommendation
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21 March 2011
Cabinet is requested to approve the establishment of the Revolving Loan Fund and
subject to further legal advice on the mechanics of the scheme, agree that the
Council procure a Loan Fund Manager to administer a fund in the manner outlined within
the report.
Cabinet is requested to approve the creation of the Pathfinder Business Grant fund
which will be co-ordinated by the North Norfolk Business Forum with ultimate
responsibility for the approval of grant applications resting with a grant panel as
detailed in the report.