Garrett B. Hunter is president of the Business Development Co. of Rhode Island, a non-bank lender that provides debt and equity financing to help promising – but often undercapitalized – companies in Rhode Island and nearby Connecticut and Massachusetts. In other words, Hunter and the BDCRI are willing to take a chance where other lenders are not in order to create and retain jobs in the area. Some of the largest banks in Rhode Island are member financial institutions of the BDCRI and are major shareholders. While the company pays no dividends and its stock is not traded, shareholders benefit from helping strengthen the local economy.

PBN: How has the so-called credit crunch affected lending at BDCRI? Does that mean more calls for help from businesses?

HUNTER: In the current economic environment, we expect to see a growing need among businesses for gap financing. And, in fact, during the last few months we’ve been getting more inquiries to have us participate as a subordinated lender in high-quality deals. Banks in general are tightening their credit standards on business lending, and definitely are more conservative than they were six months ago. Since banks are in the business of lending, they want to lend. They’re responding by doing smaller deals and bringing us in to provide subordinated loans to fill the gap between what they are willing to provide and what borrowers need. Since our funding is treated by the senior lender, most often a bank, as capital, we help strengthen the balance sheet for the borrower and the senior lender. While this is creating more opportunity for us, it’s enabling banks to continue to lend.

PBN: Are BDCRI’s lending standards also tightening, where some companies that might have gotten financing from you before are just too risky now?

HUNTER: We’ve tightened our standards in that we used to do more direct lending to companies that weren’t bankable, but which needed to become more stable to be bankable. But our experience has shown that those borrowers frequently can’t achieve the level of stability that many banks look for. A weaker economy tends to aggravate this situation, so we have reduced the amount of direct loans we provide. Our standards for gap financing, however, have not changed. Since the funds we provide, which are secondary to a loan from a senior lender, have always carried higher risk, we always look to make sure that our borrowers have a sufficient revenue stream and strong enough cash flow to pay back their senior lender and us. We’ll continue to work that way.

PBN: How many businesses can you help each year?

HUNTER: We have the ability to lend to 12 or 15 companies a year, which we have done traditionally. For our most recent year, which ended last April 30, our loan volume was, however, down from the previous year. Based on recent opportunities, it’s very likely we could have a banner year. Our capital position lets us fund up to $4 million in new loans each year. However, we can lend significantly more and can provide individual loans up to $3.5 million. When we do the larger deals, we join with other capital providers. Frequently, we help a bank close a deal not only because we provide gap funding, but also because we can find other sources of capital to complete the transaction.

PBN: What are the factors driving business-borrowing today?

HUNTER: The same as always, a need for capital so a business can achieve its plan, be it restructuring, acquisition, or expansion. Senior lenders look for us to provide funding to help strengthen the borrower’s balance sheet and to supplement what they’re doing. This often takes the form of working capital, but also helps pay for machinery, equipment, new product development, expansion and growth.

PBN: How are business owners thinking about risk in a riskier business environment?

HUNTER: The level of caution and concern about the effects of increased costs of business has risen significantly since the beginning of 2008. Costs are going up in all areas and many businesses are concerned that they will not be able to pass their increased costs on to their customers. If they can’t, for competitive or other reasons, their profit margins will be squeezed. Lower margins mean less opportunity to invest in their business. The biggest concerns for many companies are increasing energy and commodity cost. It’s like an across-the-board tax increase, but without any offsetting deductions. In addition, many businesses have already seen some drop in demand due to customers tightening their belts to pay for their own increased energy and other costs. Companies that took steps some time ago to operate lean are in a good position to expand into areas where competitors retrench. We’re working with several of them, and for them this is an exciting time with a lot of growth potential.

For more information about the Business Development Co. of Rhode Island, visit www.bdcri.com/.