Leveraging State Policy to Fund Entrepreneurs and Build Sustainable Entrepreneurial Ecosystems

Key Practice

This brief outlines an example of how one organization leveraged state policy to address the perennial problem of access to capital for entrepreneurs. By financing a revolving loan fund, the program became a robust platform for entrepreneurial ecosystem development. This story explores three practices that when used in concert have created a notable effect within and across many local communities. Those practices include:

Crafting policy for the state legislature to create a loan fund and statewide network.
Creating the revolving loan fund.
Designing a program that transforms the basic loan fund into a platform for communities to fund and support entrepreneurship.

About This Brief

Kansas Center for Entrepreneurship dba NetWork Kansas was established in 2006 by the state legislature as a component of the Kansas Economic Growth Act of 2004. NetWork Kansas seeks to prioritize entrepreneurship and small business growth as a driver for economic and community development in the State of Kansas. Backed by 500+ partners statewide, NetWork Kansas connects entrepreneurs and small business owners with the expertise, education, and economic resources needed for success in order to promote entrepreneurship across the state.

This brief features insights from Imagene Harris, director of strategic partnerships and impact investment at NetWork Kansas. Harris describes the organization’s start in the state legislature, how NetWork Kansas has developed the revolving loan fund, and specifically the E-Communities program – an expanded program that would not just support small businesses, but would also become a platform for connecting and empowering entire communities to take control of their economic destinies.

Highlighted in this brief are some noteworthy aspects of NetWork Kansas’s approach:

The basic elements of a revolving loan fund.
How policy and legislation can increase funding and connect entrepreneurship to inclusive economic development.
How a funding program was created as a platform to unleash deeper entrepreneurial activity in a community.
A specific example of how NetWork Kansas has implemented a statewide revolving loan fund and individual community loan funds as part of its greater E-Communities initiative.
How rural communities and entrepreneurs are benefiting from a revolving loan fund and wider E-Communities approach.
Insights from NetWork Kansas on practices that make have made the E-Communities approach successful.
Resources for further guidance and reading.

Jump to a Section

I. What Is a Revolving Loan Fund?

A revolving loan fund is a self-replenishing pool of money that utilizes interest and principal payments on earlier loans to issue new ones. While the majority of revolving loan funds support local businesses, they are also used in other sectors such as healthcare, community development, and environmental cleanup.

The fund is named for the “revolving” aspect of its loan repayment: the central fund is replenished as businesses owners pay back their loans, creating the opportunity for the fund to issue loans to new businesses and potentially continue into perpetuity with little to no additional investment of outside money.

Typical uses for revolving loans for small businesses include:

Operating capital
Acquisition of land and buildings
New construction
Facade and building renovation
Landscape and property improvements
Machinery and equipment

A revolving loan fund is often used in combination with more conventional sources of funding, serving as a bridge between the amount a borrower can obtain on the private market and the amount needed to start or sustain a business. For example, a borrower may be required to obtain a certain percentage of project financing from other sources.

Effective revolving loan funds issue loans at competitive rates, to create an opportunity for borrowers that might not otherwise exist in the market. Revolving loan funds are not grants; they must be able to generate sufficient interest to replenish the fund for future loans. With competitive rates and flexible terms, these loans provide access to new financing sources for borrowers while lowering overall risk for participating institutional lenders. For many borrowers, access to capital and flexibility in collateral and terms is more important than lower-than-market interest rates.

When starting, there are a variety of channels for obtaining initial funds, including public sources such as the local, state, or federal government, as well as banks, philanthropies, and other funding institutions. This particular brief outlines an example of using state legislation to unlock the initial seed funds and then using those to catalyze a larger platform of activities.

II. NetWork Kansas and the E-Communities Program: A Revolving Loan Fund and Much, Much More

NetWork Kansas is a 501(c)(3) nonprofit organization dedicated to making entrepreneurship a priority for economic and community development in the state of Kansas. Today, the organization connects aspiring entrepreneurs and emerging and established businesses to a deep network of business-building and community development resource organizations across the state. Support comes from a variety of sources, but NetWork Kansas was born out of legislation with a more modest goal.

A Start in State Statute

“We were created out of the 2004 Kansas Economic Growth Act,” says Harris. “In that statute, we are required to do two main things: be a central portal for resources for small businesses in Kansas, and create a matching loan fund to assist rural and urban distressed small businesses.”

To achieve the charge of the Kansas Economic Growth Act, NetWork Kansas and the initial loan fund were seeded by the Entrepreneurship Tax Credit. The first year, this put $450,000 into a new revolving loan fund called StartUp Kansas. This first loan fund was a statewide program for both rural and urban-distressed areas, with decisions directed by a single, centralized review committee. Now, NetWork Kansas can annually sell up to $2 million of tax credits to help replenish the fund. This fund never sunsets, which is also a unique part of the legislation.

The success of the StartUp Kansas regional loan fund illustrates what makes the loan fund “revolving.” “We have not replenished the StartUp Kansas fund in at least a few years,” says Harris. “We have been making loans since 2006 and over time, as the repayments grew, we have been able to sustain the loan fund on the principal.”

This means that dollars passing through the revolving fund can be put into programming that doesn’t generate a financial return, or used to seed new loan funds – like the E-Community loan fund program.

Enter E-Communities

The results of the StartUp Kansas regional revolving loan program were promising. After working closely with community leaders, NetWork Kansas saw an opportunity to expand the program’s impact to further empower communities and support entrepreneurship.

“About a year or so after it was established, our leadership decided it made sense to provide some communities with the ability to make decisions on small business matching loans occurring in their community,” remembers Harris. “This was the creation of the E-Community loan program.”

A NetWork Kansas E-Community is a community that has made a commitment to cultivating an entrepreneurial environment by identifying and developing resources to help local entrepreneurs start or grow businesses. Selected communities partner with NetWork Kansas to establish a locally administered revolving loan fund to assist entrepreneurs with capital, to increase connectivity to resources available to entrepreneurs and small businesses, to initiate activities to generate entrepreneurial development, and to participate in a statewide partnership with other E-Communities.

While StartUp Kansas loans are administered by NetWork Kansas and a single decision-making board, E-community loans are limited to a designated region, called an “E-Community,” and decisions are made by a financial review committee established by a local E-Community team.

Loan terms and rates are set by each individual E-Community. NetWork Kansas encourages each E-Community to consider setting interest rates to ensure the longevity of the loan fund. “At first, a lot of them were setting interest at zero percent,” says Harris. “That’s great, but we’ve got to be thinking about sustainability. The interest rate isn’t always as much of a barrier as you might think for small businesses.”

Goals of the E-Community Program

Tailored by communities to meet their specific needs, each E-Community program in the state is shaped by the same core goals:

Grow a flourishing, sustainable entrepreneurial environment supportive of business startups and expansions.
Engage and/or develop entrepreneurial resources to meet identified community and business needs.
Create a revolving loan fund to provide matching loans to entrepreneurs and small businesses with local control of decisions and terms.
Forge a community vision centered around entrepreneurship as a tool for economic development.

Bridging Funding Gaps for Rural Communities

Due to their flexible, locally controlled nature, E-Communities are particularly good at addressing gaps related to access to resources and capacity in rural communities.

“Almost half of our E-Community deals are going to communities with populations under 5,000,” says Harris. “That’s something we think is pretty neat and is indicative of the power of partners and networks.”

Tapping into local know-how is an important feature of E-Communities.

“Rural communities are often innovative by necessity,” says Harris. Often, you may go into a community “and see creative ways that they are solving challenges. There is an inherent entrepreneurial mindset. How can we foster that more?”

III. How it Works: The E-Communities Program in Action

Becoming an E-Community

E-Communities are selected through a competitive process overseen by the NetWork Kansas’s Vice President of Entrepreneurship and the E-Communities Program Team.

When entering into partnership with NewWork Kansas, successful communities seek to foster the growth of their local entrepreneurial ecosystem, in many ways beyond just setting up the loan fund.

For E-Communities, a small loan can make a big difference. “It’s a pretty diverse set of applicants,” says Harris. “You see a lot of ‘Main Street’ businesses: restaurants and retail. We also fund service industry businesses and some small manufacturers. They’re usually relatively smaller projects. The average total project size is typically under $150,000.”

Components of an E-Community

E-Communities are shaped by local decision-makers, but the following components are present in all 66 Kansas E-Communities:

Local leadership teams are committed to meeting regularly to provide the overall direction and leadership for the E-Community and to discuss ways to create a flourishing ecosystem. The team meets monthly to discuss the progress of the E-Community, methods to promote and utilize the E-Community fund, identification of key stakeholder groups and how to engage them, as well as proactively reaching out to other E-Communities to discuss best practices.
A local financial review board is tasked with acting as the loan committee for E-Community loan applications. They review applications and approve/disapprove loans to local entrepreneurs and small businesses, as well as determine interest rate, length of term and security position (or choice to be unsecured) for each approved application.
A locally-controlled revolving loan fund identifies local partnerships for administering and servicing the loans. This organization will prepare the loan documents, close the loans, collect loan repayment checks from the business, forward those payments to NetWork Kansas to be deposited back into the E-Community account, and communicate with the business regarding late payments.
Ongoing engagement with local sources of public and private funding to help local businesses find additional matching funds. These can include local banks, credit unions, or other regional revolving loan funds that are typically associated with the city, county, and/or regional level economic development organizations.
Access to the NetWork Kansas network of over 500 partners, focusing on connecting entrepreneurs and small business owners to a larger network of the education, expertise, and economic resources they need.
Access to and creation of entrepreneurship programming designed to benefit different types of businesses and different stages of growth.
A marketing fund supports the development and/or implementation of special projects and initiatives.
A youth entrepreneurship challenge hosted through local schools to bring more youth into entrepreneurship as a viable career path.

Making the Loans

At the core of the E-Community program is the E-Community Revolving Loan Fund. NetWork Kansas draws from their larger revolving loan fund and then works with each E-Community to provide access to up to $45K of gap financing per loan. Some E-Communities might be able to loan as much as $150K (about three businesses) in a year but not all of them. There is opportunity for E-Communities within each region to access the pool of funds until they’re depleted. It’s a modified first come, first serve where metrics are used to prevent any one community from using too much.

Here’s an example of how the matching loans work:

Assume a small business applicant needs a total of $60,000, of which they are providing $10,000 of their own capital.
Of the remaining $50,000 needed, the E-Community can provide no greater than 60% of that gap (in this case, the E-Community funds could be no more than $30,000 of the $50,000 needed).
The other 40% minimum (in this case, $20,000 of the $50,000 needed) must come from a financial institution (defined as a bank or credit union) and/or a local/regional public source of capital (defined as city/county revolving loan fund, microloan, Certified Development Company funds, USDA, IWW Main Street, or community foundation).

“We really like to talk about the dollars leveraged,” says Harris. “It’s not just the E-Community loans that are happening here. We are gap financing – the last dollars in the deal. For the entire E-Community portfolio, our dollars have only been about 17% of the total dollars needed to get projects done. These funds are used to leverage dollars from other sources.”

E-Community Coaches

The E-Communities program is structured to facilitate community engagement. Four regional E-Community Coaches that cover the west, central, and eastern parts of the state report to NetWork Kansas’ vice president of entrepreneurship. Each coach is a point of connection between the E-Communities they serve and the greater resources of NetWork Kansas.

“The coaches will attend some of the meetings and share information about any changes to the E-Community program and other resources that NetWork Kansas might have that would complement the community’s strategy” says Harris. “They might help them consider if or which Board Certified Program to bring to their community, share what another E-Community with similar challenges or a similar entrepreneurship strategy has done recently. They are strategy guides. We don’t want to be too imposing on the E-Communities, it is about empowering them after all, so it’s often more about helping them understand our policies, guidelines, and programs, and seeing how those connect with their specific goals.”

The coaches each share a key characteristic, “They have very entrepreneurial backgrounds. I think that plays a huge part into why our organization looks the way it does,” says Harris.

IV. An Adaptable Platform for Ecosystem Development

The diverse offerings within the E-Communities program could be described as a platform that has helped to develop the entrepreneurial ecosystem infrastructure across many Kansas communities over many years. The loan opportunity itself is a powerful magnet that brings in entrepreneurs who are looking for an essential resource: capital. However, the wisdom in the program design is that it did not stop there.

The designers of the E-Communities program recognized that once entrepreneurs had already been engaged through a loan, there was the potential to further develop those entrepreneurs and the networks around them to ensure those businesses could thrive long into the future. The E-Communities program also has a powerful network effect in that it immediately makes resources such as expertise, support, relationships, etc., from the other 66+ E-Communities available to each local community. It then uses this momentum around the program to make the local environment more entrepreneurship-friendly. Over time, this creates a growing web of partners and institutions that become advocates for entrepreneurship across the community.

 A great example of this in action was when COVID-19 hit Kansas in March 2020 and NetWork Kansas was able to quickly adapt this infrastructure to help entrepreneurs in the pandemic.

Through the web of connections created by NetWork Kansas and the E-Communities initiative, the Kansas Department of Commerce, Kansas banks, the Kansas Health Foundation, Blue Cross Blue Shield of Kansas, Evergy, and other partners were able to create multiple programs overnight to inject assets into small businesses and nonprofits as swiftly as possible.

From mid-March to June 2020, NetWork Kansas was able to administer new loan and grant programs to provide funds to those entrepreneurs who needed them most. All decisions on loans and grants were made by partners and E-Communities further emphasizing the importance of empowering and engaging at the local level.

Measuring Impact

NetWork Kansas updates a metrics dashboard monthly to capture how loans are performing and how they are serving.

“Each month, our budget director creates what we call our economics report. It shows the number of loans and dollars that have been disbursed,” says Harris. “It also shows dollars leveraged from other private and public sources.”

“We also capture the business composition or stage – startup, expansion, purchase, etc. We look at the business industry – manufacturing, retail, restaurant, or service. We also track if the businesses are man- or woman-owned,” says Harris. Recently, the reports have been expanded to capture data on race.

Here are some of the key metrics that are used to track the programs’ progress.

Statewide Metrics

Total loans
Growth of the loan fund
Overall award total
Number of communities participating in the loan program
Number of communities that approved at least one loan during a fiscal year
Historical statistics:
Year over year total loans awarded and amount
Additional funds’ leverage since the beginning of the program

Individual E-Community Metrics

Population of business location
Industry area (service, retail, restaurant, manufacturing)
Business composition: startups, expansions, or other (purchases, succession managements, and retentions)

V. Outcomes

Funding

Since E-Community loan funds are intended to be gap financing to close an undercapitalized deal, many local deals would not have happened without the E-Community funds. It’s particularly meaningful that $17.3 million in E-Community loans have leveraged more than $83.5 million in capital for Kansas businesses since 2007.
The E-Community program is now in its thirteenth year and has grown from six communities in 2007 to 66 in 2020. To date, E-Communities have provided $21.5 million to businesses, leveraging an additional $99.2 million in bank loans, owner down payments, resource partner loans, and more.
674 E-Community loans were awarded (to 643 businesses) totaling $21.8M.
E-Community funding leveraged an additional $99.9M in resource partner loans, bank financing, owner investment, and down payment.

Partners

Among all the 66 E-Communities there are more than 700 community stakeholders coming together, and for the most part doing so regularly, to discuss how to create an entrepreneurial environment in their communities, including both rural and urban distressed.
550+ resource providers

Programs

NetWork Kansas Board Certified Programs and Pilots
19 Growing Rural Businesses programs offered with 354 participants to date
46 E-Communities have offered the Destination Business Bootcamp program
36 Ice House Entrepreneurship programs have been offered to 420 students to date
212 Youth Entrepreneurship Challenge (YEC) Series have been offered with 4,134 YEC participants
6 Maker Space Bootcamp engagements offered with 30 participants
Pilots:
Remote Work Certificate Program, Wheelhouse Incubator, Leadership Douglas County, Inner Entrepreneur

VI. Designing for Equity and Inclusion

Ensuring equity and inclusion is an area of growth for NetWork Kansas and the E-Communities initiative.

“This has been a big conversation,” says Harris. “It feels like the appropriate next step to make sure we continue to grow in our work, and that our offerings remain impactful and relevant to the communities we serve.”

Moving forward, it’s critical for NetWork Kansas to identify ways to incorporate equity and inclusion into all of their work, including the E-Community program, Harris says.

“While we do have a lot of counties that are majority white people, we also have a lot of rural towns that are not. Their demographics are changing quite dramatically,” says Harris. “Another conversation is, what are we doing to support our community partners? How are we shaping external conversations around diversity and inclusion?”

NetWork Kansas is also exploring how to address potential biases in lending and barriers to funding.

“How a loan fund is set up and how that affects accessibility is something else we have started examining. Right now, all of our funding programs require a match. We know that can be a barrier,” says Harris. “What is our role and/or responsibility in reviewing this potential issue? Do we need to consider creating something new or making changes to our current programs? Do we have a role in finding another partner in the community who might be better suited or prepared or experienced to provide a different type of resource? Is it a problem at all?”

To specifically address these gaps, NetWork Kansas launched their Empower Fund in June 2021, which is a no-match microloan (up to $15K) for BIPOC entrepreneurs. This is being piloted in four E-Communities – Wichita, Topeka, Liberal/Seward Co, and Dodge City/Ford County. Each of these are using their established E-Community review committees to make the decisions on these microloans as well. These loans also have a required technical assistance portion such as training or direct support from a local SBDC [Small Business Development Center] representative.

Network KS leadership have also been participating in the Kauffman SPARK DEI Growth cohort to increase their knowledge and awareness around DEI, and start working toward seeing what we can bring back to their organization and partner networks. Also this year, they hired an Inclusive Director and created a DEI Advisory Board to help guide this work into the future.

VII. Recommendations: Steps for Community Revolving Loan Fund Success

After over a decade with NetWork Kansas, Harris has plenty of advice for communities considering starting their own revolving loan fund:

➔ Seek out who isn’t talking to you.

“Start building the partnerships first, or at least simultaneously. This means also seeking out organizations or individuals you may not have previously engaged. Go ahead and start using your diversity, equity, and inclusion lenses.”

➔ You can always start small.

“You start where you can start. If you have a state or another funder that’s ready to do something statewide, great! If you have a county that has found a financial resource to build a small loan fund, wonderful! A resource is a resource. We often see a copy-cat effect in smaller communities; one small loan fund might evolve into several small funds as the word spreads on how to get it done. Do not miss out on an opportunity for fear that the impact is not big enough.”

➔ Emphasize community leadership.

“We believe for an entrepreneurship-led economic development strategy to be successful, the local community leaders need to be empowered in the strategic process. From building a leadership team to move the work forward to making decisions on individual loans there needs to be opportunities to empower local partners. For us, and our E-Community coaches in particular, this means there is a lot more suggesting and sharing of best practices than providing rigid rules.”

➔ Identify early wins.

“When you are starting something new, it is okay to start with the low-hanging fruit. Where are the obvious partnerships? Which community has more established infrastructure to identify potential borrowers? It is okay to find some easy wins early. It can help build momentum as you continue working toward building the relationships that take more time, or identifying the partners that have not yet been engaged. Having some success stories to share can help pique interest and open up doors for conversations with different communities.”

➔ Set interest rates to sustain the loan fund.

“You’ve got to be thinking about sustainability. The interest rate isn’t always as much of a barrier as you might think for small businesses, we have learned to at least to charge even something like two to five percent.”

VIII. Resources

E-Communities Resources

NetWork Kansas Economic Report – Example of data dashboard used by NetWork Kansas to track how loans are used.
NetWorkKansas.com – Official website for NetWork Kansas, E-Communities and related programs
The Legislation – The actual legislation that started the NetWork Kansas and gave rise to the E-Communities Program.

General Revolving Loan-Fund Resources

Revolving Loan Funds & Development Finance, Council of Development Finance Agencies – An overview of revolving loan funds and a resource center with case examples and support for starting a loan fund in your community.
Revolving Loan Funds Resources – A diverse set of offerings that encourage learning, best practice collaboration, and evaluations of service efficiencies and improvements, and a comprehensive resource collection and dissemination process.