ARTICLE

Need business financing? Where to look in the USVI

November 21, 2019 – Justin Moorhead

(The following is the first of three articles on supporting local entrepreneurial activity.) 

 

In the early 1990’s the Administration of Alexander Farrelly (Governor, US Virgin Islands 1987- 1995) commissioned a study to identify sources of business financing, survey the relevant financing experience of  businesses and recommend strategies to address any identified financing need.    

Companies relocating to the Virgin Islands often bring their own financing sourced through mainland providers.  Local entrepreneurs lack similar opportunity.  The availability of financing could stimulate  business formation and expansion and increase ownership and employment.

The final report identified no private institutional business financing other than collateralized lending by local banks. Other notable findings were:

• Banks in the territory reported home mortgage and business loan financing activity interchangeably. Business loan financing required the posting of collateral and for most Virgin Islanders their homes constituted the most readily acceptable collateral. This conflating of home and business lending is, therefore, understandable.  Banks do not provide financing when neither collateral nor guarantees exist.
• At that time, there was little use of the federal government’s Small Business Administration (SBA) or Rural Development Administration business loan financing programs. Local banks avoided participating in these programs because of the administrative requirements. 
• The Community Reinvestment Act, a federal law enacted in 1977, encourages commercial banks and savings associations to address the needs of underserved borrowers in their communities. Because VI banks were branches of Puerto Rico headquartered companies, those institutions satisfied the law’s requirements by lending initiatives in Puerto Rico not the Virgin Islands. 
• The VI Government’s Small Business Development Agency loan program had sizable financial losses from underperforming loans. That program had limited  financial ability to address additional business financing needs. 

In 1998,  a 501 (c ) 3 venture financier was incorporated in the Virgin Islands and was subsequently certified a Community Development Financial Institution (CDFI). These organizations  are an outgrowth of the Community Reinvestment Act.  They are private institutions that provide loans or investments in communities often ignored by traditional financial institutions. 

The local CDFI received a match grant from the US Treasury. The company then attempted to acquire the commercial loan portfolio of the  Chase Manhattan Bank when that bank left the Virgin Islands.  A larger asset base would have allowed the development of a more robust financing platform for financing business loans.  The acquisition failed to garner the support of the   VI Banking Board. After making several investments and having available limited financing capability, the CDFI stopped aggressively  promoting its investment ability.

Today, local banks are participating in the SBA’s 7A program. Several off-island financing institutions have also originated similar loans on behalf of local businesses. Both the SBA and the University of the Virgin Islands Small Business development Center assists in identifying lenders to local businesses.

Assisted by a grant from the US Treasury, the Economic Development Bank of the VI Economic Development Authority offers its own business loan guarantee program.   Loans are available up to $500,000 under its Development Loan Program.  Other lending programs offer loan maximums to $25,000 and $100,000 . 

Other than direct financing assistance,  the Economic Development Authority makes tax incentive initiatives available to qualifying businesses.  Exemptions are available from corporate, personal, gross receipt, business property, excise, custom duties, royalty income. These programs are useful businesses with tax exposure. The Authority also administers an Enterprise Zone tax incentive program, a tax increment financing initiative and a Hotel Development support program.  

The federal government’s Opportunity Zone Financing initiative defines  geographic areas within the Territory where investments qualify for generous capital gain tax treatment (see  “Qualified Opportunity Zones Are a New Tool to Spur Investment”, by Jonathan Adams on this web site.

Individuals living on and off island have provided angel investments to a few local small businesses.  Both the SBA and the University of the Virgin Islands Research & Technology Park assist in identifying these investors.  EDC Beneficiary companies or their owners have also invested in local businesses.  Virgin Islands Capital Resources, Inc. considers investments in  co-financing opportunities in participation with other investors.    

Financing is just one of the challenges facing local entrepreneurs.  A holistic approach to providing support should include the transfer of information on existing programs as well as  advocating for, and sponsoring initiatives that comprehensively address the need of business startups and expansion phase businesses.