Page images
PDF
EPUB

future of the credit corporations, but it does suggest the following observations.

Long-term credit to smaller concerns appears to be considered inherently more risky than short-term credit. This is indicated by a comparison of typical collateral arrangements for short- and longterm loans. Commercial credit companies grant short-term loans to marginal borrowers up to 80 percent or more of collateralized accounts receivable, when banks make long-term loans of only 50 to 60 percent of market value on a good quality first mortgage to a standard borrower. In seeking to extend their operations into the area of equity capital, credit corporations make long-term loans secured by second mortgages.

Experience is still too short to permit a judgment as to the extent of the demand for the type of credit provided by the credit corporations, even with costs reduced by a certain amount of indirect subsidy. It is even more difficult to judge how much of the demand for credit is supported by willingness and ability to pay total economic costs because rates the corporations charge currently do not cover all such costs.

The volume of lending by credit corporations has not been large in absolute terms. On December 31, 1957, outstanding loans of the five New England corporations totaled $8.7 million. While it must be emphasized that these loans are primarily to manufacturers, the total amount is small when compared to the $114 million in small business loans to commercial and industrial firms by first district member banks as of October 16, 1957, according to a Federal Reserve business loan survey. Thus credit corporation loans in the region are equivalent to only about 2 percent of small-business loans of commercial banks and the ratio would be smaller if all sources of small-business credit were taken into account. While contribution to small-business financing of this magnitude seems small, it may be a quite important amount at the credit margin. Moreover, lending activities of the credit corporations are expanding rapidly-total loans outstanding rose by almost one-fourth in 1957, although potential growth is limited if funds continue to be sought on the present basis. Outstanding business loans of the Small Business Administration in New England outside Vermont were even somewhat smaller-$8.1 million as of June 30, 1957-than those of the 5 credit corporations.

Credit corporations have resulted from efforts of private institutions. and individuals to cooperate in the performance of a credit function. The continuance of such cooperation is an important factor in the dayto-day operation of credit corporations. The local representation provided by commercial banks is especially necessary in directing funds to the best uses.

State development credit corporations are young among financial institutions and they are still in an experimental stage. Some changes in operating methods are to be expected as additional experience is gained and as conditions change.

APPENDIX A

(See status table, p. 150 of this committee print.)

APPENDIX B

Statistics on northeastern development credit corporations, June 30, 19591

[merged small][graphic][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed]

STATE DEVELOPMENT CORPORATIONS: THE

1

PENNSYLVANIA EXPERIENCE 12

By William R. Davlin, Secretary of Commerce, Commonwealth of Pennsylvania, and Chairman, Pennsylvania Industrial Development Authority

Between August 1956 and October 1958, the Commonwealth of Pennsylvania jointly with community nonprofit industrial development corporations, banks, and insurance companies initiated the financing of 68 new manufacturing plants and plant expansions costing $23,700,000 and creating 11,761 new factory jobs, all of them in areas of substantial chronic unemployment. The Commonwealth's participation in this financing has been extended through the new Pennsylvania Industrial Development Authority, a public corporation and instrumentality of the State government created by the general assembly under the Pennsylvania Industrial Development Authority Act.3

I

HISTORICAL BACKGROUND

Although Pennsylvania enjoys second position among the States in the Nation's manufacturing industry, economic history has dealt her some cruel blows. Since the turn of this century, certain industries upon which she has been dominantly dependent have variously experienced readjustments or maladjustments, economically or technologically. As a result, these industries have failed to generate the volume of employment and business opportunities one normally observes in the American economy. In terms of specific areas and communities and at differing points in time, this has meant either deterioration of the local economic base or failure of the economic base to expand.

For example, lumbering was a major industry for many Pennsylvania areas and communities in the early decades of the century. The philosophy of exploitation that characterized that industry nationally in those years, lack of reforestation and fire control, and the absence of scientific conservation practices have led to depletion of forest resources and a decline of lumbering in many sections.

Textiles were once a major source of employment in a large number of Pennsylvania communities, large and small. The "flight" of textiles to the South from States of the East following and continuing since World War I, and more latterly the expansion of textiles in the South based on the newer synthetic fibers, has meant, again, a partial deterioration of the economic base in affected Pennsylvania com

1 Article, "Law and Contemporary Problems: Small Business," School of Law, Duke University, Winter 1959, vol. XXIV, No. 1.

For statutes relating to and recent report of Pennsylvania Industrial Development, Authority see p. 347. [Editor's note.]

'Pa. Stat. Ann, title 73, §§ 301-314 (1957).

Despite some free services available to them, lending costs of credit corporations are higher than those of conventional financial institutions because most of their loans are problem cases. Commercial banks usually consider about 0.5 percent as the average lending cost for business loans. Insured mutual savings banks, whose mortgage loans are almost all small, had a total operating-expense rate of only 0.7 percent of earnings assets in 1956, and this includes the cost of servicing savings accounts."

The operating positions of all corporations except Rhode Island improved in 1957 as compared to 1956. The other four corporations had net operating incomes in 1957, and it is anticipated that the full amounts will be added to reserves for bad debts. These corporations intend to build up their tax-free reserves to at least 20 percent of outstanding loans. At present, these reserves vary from less than 1 to 4 percent of outstanding loans.

PROBLEMS OF DEVELOPMENT CREDIT CORPORATIONS

The development credit corporation in its charter is given the unique function of using a pool of funds to stimulate a State's economic prosperity. It is entrusted with "seed" money to encourage other investors. With careful management, the original funds are expected to expand to a sizable revolving fund for continued reinvestment.

In this process, the corporations are challenged to allocate their resources among competing needs. The problems of allocation involve decisions on which use of funds will create the most employment and which borrowers to aid first. The problems of management include questions of how much interest they should charge borrowers and how much interest they should pay their members. If the corporations prove successful, they are then faced with the problem of enlarging the funds available for further economic development efforts. Effective use of funds

State development credit corporations can stimulate employment in at least four different ways. They may buy stock in small and new businesses (although this is prohibited by some charters). They may make long-term loans on risky collateral. They may build or buy property to be leased or sold to businesses whose operation would create jobs. They may provide funds to other development groups to use in their development programs.

So far, purchase of stock has been avoided because the corporations' funds would be tied up with no dependable cash inflow or turnover. Direct investment in property for sale or lease has been made sparingly. While the credit corporations have worked closely with other development agencies, they have generally found it desirable to make any financing arrangements directly with the borrower.

The great preponderance of credit corporation activity has been in long-term loans to manufacturers. In some instances the special circumstances of a specific community or the program of a local development group have led to loans to nonmanufacturing concerns, but these have been exceptions. The boards of directors have decided that financing should concentrate on manufacturing activities. At a later

U.S. Federal Deposit Insurance Corporation, Annual Report, 1956, pp. 138-139.

date, the corporations may well turn to financing other employmentcreating activities. At present, however, the directors feel that the number of jobs created or saved is largest if the loan is to a manufacturer. As shown in table 2, most loans have gone to manufacturers in light industries rather than to those where a large fixed investment is required.

Credit corporations have not directed their lending toward any particular sized business. While most of their borrowers would be classified as small businesses, they are among the larger concerns in the small-business population. This may be a result of the desire to promote as large an additional amount of employment as possible by use of loans. As shown in table 7, the ratio of jobs to loans is significantly higher for the larger loans. Although this does not prove that the larger loans created or saved more jobs than the smaller loans such a possibility seems likely.

TABLE 7.-Comparison of size of borrower and size of loan, New England development credit corporations1

[blocks in formation]

Operating expenses as a percentage of loans increase as loan sizes decrease. A significant move toward smaller loans would adversely affect the income of these corporations. This could be counteracted, of course, by charging a higher rate on such loans.

Interest rates

The important question of what rates should be charged borrowers continually confronts credit corporations as it must arise for any privately financed agency operating in the marginal credit area. There are two aspects to this question. On the one hand is the question of whether the rates being charged by the credit corporations fit into the pattern of interest rates developed by the free operation of our economy. On the other hand is the question of whether lending rates are high enough in relation to borrowing costs to provide an operating margin broad enough to support the corporation's activities. One standard for an appropriate interest rate is that every business operation should "pay its own way." Credit corporations have generally covered their operating costs but they have had some free services provided to them and they have not met the going market rates with regard to borrowing from member institutions and returns on capital

« PreviousContinue »