is the recently formed Industries for Waconia, Inc. This corporation will erect and own the industrial buildings required by manufacturers moving to this town and will either lease the building to manufacturers on a straight lease arrangement, or with the option to purchase at a fixed price at any time during the extension of the lease. The lease payments will be designed to completely pay the cost of construction of the building, over a designated period of time. After the first building is complete and the payments are made to the corporation under the terms of a lease, these payments will be used to provide capital for the erection of further industrial buildings and for the purpose of repaying the investors in the newly organized corporation.

Work was begun this week on the new industrial building with an area of 25,000 square feet of floor space ***. Twenty-four volunteer solicitors who have unbounded faith in the future progress of the community, armed with subscription receipts for common and preferred stocks in Industries for Waconia, Inc., are calling on people in the community and meeting with success in securing financial support from residents in the community to provide an industrial building and payrolls for the community. Common stock has a par value of $10 per share. Preferred stock par value is $100 per share bearing 41⁄2 percent interest.

WELLS (2,475)

The Wells Development Corp. was organized on April 23, 1957, and has secured its funds by the sale of membership certificates at $25 each to 85 persons. Its major achievement to date has been assistance in getting the F. M. Stamper Co., poultry processors, to relocate in Wells. This firm operated a limited egg-buying and poultry-processing plant in Wells prior to December 1956, at which time it left the community. Officials of the firm with headquarters in Missouri indicated that they would like to return to Wells if a certain parcel of land was made available at a reasonable price. The land could be purchased for $3,500 but the Stamper people thought this was too much. The development corporation agreed to pay this price and then sold the property to the Stamper Co. for $2,000. The firm has since purchased a building which it rented upon its return to Wells. The F. M. Stamper Co. employs about 300 people and is engaged in the processing and canning of boneless chicken and turkey. The Wells Development Corp. has also been instrumental in getting another firm to promise to locate in that community this spring.

WILLMAR (9,410)

Willmar Industries has capital of $21,500, contributed by about 100 shareholders. In 1953 the efforts of this development corporation made possible the raising of $25,000 for the construction of a building occupied by the Swanson Baking Co. More recently Willmar Industries has been responsible for acquiring a building which it leases to the Minnesota Poultry Products Co., a firm which buys feathers and processes them into feather meal. This development corporation also owns 82 acres of land for industrial expansion.

WINONA (25,031)

The Winona Industrial Development Association was organized in 1950 to promote the growth of the city by acquiring land for new industries, purchasing buildings for lease or sale. About 85 con

tributors have supplied capital of $87,000 to this nonprofit corporation. With the help of bank loans, which have run as high as $100,000, the Winona Industrial Development Association has accomplished the following: Provided a building for the Badger Foundry Co., which this firm purchased 5 years later; provided a building which was later purchased by the Winona Boxcraft Co.; arranged for a building and extra land needed by Neco Ordnance Corp.; handled negotiations for land acquired by National Can Refining Co.; constructed and sold a building under contract for deed to Plasti Industries—took back this building in 1957 and leased it to another company; constructed an airplane hangar for Van's Air Service, which this firm purchased in 1957; handled negotiations for land needed by the Schultz Transit Co. The association makes small moving expense loans on a returnable basis over a 2- to 3-year period but is not permitted to loan money for operating purposes. About 450 jobs have been created through the activities of this development corporation.*

4 Part IV, dealing with the relationships of SBA to local development corporation's is not reprinted here.

STATE DEVELOPMENT CREDIT CORPORATIONS

By Paul S. Anderson, Federal Reserve Bank of Boston 1

INTRODUCTION

State development credit corporations are unique private financial institutions with the public interest purpose of using financing to develop the economies of their States. They supply funds which the recipient concerns are unable to obtain from conventional financial sources. Other specialized organizations which have the same general developmental purpose include local or community industrial foundations and State credit authorities. The local foundations are generally also private institutions but have different organizations and operating methods.2 State credit authorities differ from State development credit corporations in that they are public agencies which use public funds in their developmental work.3

This study analyzes State development credit corporations with special reference to small-business financing problems. It should be emphasized that this is not an appraisal of the effectiveness of development credit corporations in carrying out the main function for which they were especially chartered, that of developing the economies of their States. Most of the discussion here will center on the lending function. The credit corporations, however, view their activities as more than lending operations. Loans are looked upon as a development tool. For example, a credit corporation loan usually brings forth other funds from conventional sources so the development benefit is viewed as multiplied. In addition, a loan is a way of directing management counsel to businesses which may be having mangement difficulties but which would not seek managerial aid directly. Finally, a business showing promise may be able to grow

1 Reprinted from Senate Banking and Currency Committee Print, "Financing Small Business," issued April 11, 1958. For more recent developments, see status table, p. 150.

Several thousand communities in the Nation have formed local industrial development groups to expand and diversify employment opportunities in the community. Their activities include constructing and buying in lustrial plants for lease or sale, buying and developing industrial sites for sale at or near cost to industry, making loans and investments in manufacturing concerns, gathering and disseminating economic data for the area, providing counseling services, and acting as intermediaries between industry desiring funds and financing agencies. Their chief efforts go toward aiding new industries to move into the community, but they also aid existing local concerns, many of which are small, to expand and help new firms get started.

A large part of the funds of foundations are obtained through sales of capital stock; other sources include donations, municipal grants, and borrowing. The funds are used mainly in the preparation of suitable facilities for lease to industrial concerns. Most of the businesses being ailed would be classified as small businesses, but frequently the incoming unit is a branch of a large manufacturing corporation.

In the New England States, several of these local foundations have borrowed funds from State development credit corporations. A typical financing pattern is for the local foundation to supply the "bottom" 20 percent of the cost of a plant in the community and take the ownership position, the State credit corporation supplies the next 20 to 30 percent on a second mortgage while an insurance corapany or bank supplies 50 to 60 percent on a first mortgage, A working capital loan may also be supplied by a bank.

Four States, New Hampshire, Pennsylvanis, Maine, and Arkansas, as well as Puerto Rico, have recently passed laws establishing State credit authorities, which use State fun is to promote industrial development. The funds may be used in various ways, depending on the specific statute to construct industrial parks, to lend money to local industrial foundations which are planning to build industrial facilities, to insure mort. gages of local industrial funds up to 90 percent of project costs, and also to buy bonds of State development credit corporations.

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faster with the aid of the additional funds and contribute more to the State's economy.

Fourteen States have passed legislation authorizing development credit corporations. This analysis will be based almost entirely on the experiences of the five active New England corporations. These have been in operation the longest. Available information on the New York and North Carolina credit corporations indicates that their operating patterns are quite similar to those of the New England corporations.

GENERAL BACKGROUND

State development credit corporations were established primarily for the purpose of aiding the States' economies by increasing employment through the developmental use of a specially created pool of private funds. Financing of small business is not an explicit aim of these corporations, but most of their financial aid has gone to the smaller businesses, in part because they are the concerns that are most likely to seek the type of financial assistance offered.

The first State development credit corporation was organized in Maine in 1949. In following years, corporations were organized in other New England States-New Hampshire in 1951, and Massachusetts, Connecticut, and Rhode Island in 1953. The New York and North Carolina corporations were chartered in 1955. In all, about 28 States have taken some action with respect to such organizations. A listing may be found beginning on page 150.

The active corporations have very similar organizational structures. They are chartered by special acts of the State legislatures which give them their powers, enable State regulated financial institutions to become members, and grant exemption from State income taxation. After organization, capital stock is sold, mainly to nonfinancial institutions and individuals. This capital serves the usual function of an equity base and also provides loan funds to the corporations. The second and major source of funds is loans from financial institutions which become members. Membership involves pledging lines of credit to these corporations, with the amount of the line determined by the member's capital or similar amounts such as reserves. Commercial banks, for example, pledge themselves to make loans on call up to 2 or 22 percent of capital and surplus.

As the corporation makes loans, it calls on members for funds. Most corporations have a legal or self-imposed ratio of borrowings to capital funds of about 8 to 1. At the end of 1957, the 5 New England development credit corporations had 310 members with lines of credit pledged to a total of $16.8 million.

The charter of the Massachusetts corporation states: "The purposes of the corporation shall be to promote, stimulate, develop, and advance the business prosperity and economic welfare of the Commonwealth of Massachusetts and its citizens; to encourage and assist through loans, investments, or other business transactions, in the location of new business and industry in this Commonwealth and to rehabilitate and assist existing business and industry and so to stimulate and assist in the expansion of all kinds of business activity which will tend to promote the business development and maintain the economic stability of this Commonwealth, provide maximum opportunities for employment, encourage thrift, and improve the standard of living of the citizens of this Commonwealth; similarly, to cooperate and act in conjunction with other organizations, public or private, in the promotion and advancement of industrial, commercial, agricultural, and recreational developments in this Commonwealth; and to provide financing for the promotion, development, and conduct of all kinds of business activity in this Commonwealth."

Directors are elected by the stockholders and members (creditors) with members generally choosing two-thirds of the total. The directors elect officers. The chief administrative officer may be a president, vice president, or manager. The organizational structure of credit corporations allows them a great deal of flexibility in meeting new problems and in responding to variations in local and regional needs. Up to December 31, 1957, the 5 New England corporations had extended about 230 loans totaling $14 million. Outstanding loans at year end were $8.7 million. About one-fourth of the loans have been repaid in full. Four of the New England development credit corporations have shown modest operating book profits. In all these instances, the entire profit has been allocated to the reserve for bad debts. Five loan losses totaling about $70,000 have occurred, 4 of them during 1957. The loss ratio is only 0.5 percent, but favorable economic conditions have generally prevailed since these corporations were set up, so this loss ratio should not be considered indicative of future prospects. Organizational and operational data for the five New England corporations, as well as for the New York corporation, are summarized on page 96.

While State development credit corporations have the organizational structure of profitmaking corporations, they are more accurately described as nonprofit institutions. Dividends are allowed by the charters, but none are currently contemplated and stock purchases are considered donations rather than investments. The member financial institutions donate free services and make credit extensions at less than market rates. While profits are not a goal, credit corporations strive to have operating income cover their lower than strictly competitive costs so that the safety margin of capital is not diminished.

CHARACTERISTICS OF BORROWERS

A business concern may formally apply for a credit corporation loan only if it cannot obtain enough credit from conventional sources, which in practice usually means commercial banks. Most applicants could have obtained a certain amount of credit from conventional sources, and in many cases have done so, but there must be evidence of a rejection by conventional sources of the loan which is requested from the credit corporation. While most credits granted by these corporations are undersecured according to conventional standards, the borrower himself may be "A-1" for another amount or type of loan.

For descriptive purposes, concerns borrowing from credit corporations can generally be placed in 1 of 3 broad categories. The first consists of those concerns which are profitable, have good prospects, and are planning to expand. To obtain the type of facilities which would accommodate the volume of operations they hope to achieve, they need more financing than they can obtain from conventional sources. The second general category includes concerns which will begin operations in a community if there are suitable plant facilities. Credit corporations will often grant credit to provide the facilities. in such cases if the area has surplus labor. Frequently such credit. is extended in conjunction with a local industrial foundation. A third category of borrowers includes concerns in a marginal status