Are Revolving Loan Funds A Better Way To Finance Rural Development?
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Revolving loan funds (RLF's) operate, in principle, by issuing new loans as old loans are repaid. Although best suited to increasing credit access for viable firms that lack alternative funding sources, many RLF's are assisting local businesses in need of capital but financially nonviable. Two major problems arise when RLF's are used to transfer this kind of public subsidy to failing businesses: (1) RLF's require periodic refunding to avoid continued erosion of their capital base and (2) in lending money to high-risk borrowers, RLF's experience high loss rates.