Financing Businesses in Rural Alaska

Mainstream banks sometimes shy away from financing businesses in rural Alaska, but there are options for entrepreneurs in Bush communities.

By Julie Stricker

When Hugh and Trina Short decided to move from Anchorage back to their hometown of Bethel and open a Subway sandwich business in 2001, they knew they faced many hurdles.

First was finding a space to lease. The Shorts found a neglected, dilapidated building near the center of the town of 5,400 that looked promising. They wrote up a business plan and Nuakauiak Yup’ik Corp. of Toksook Bay agreed to go into a partnership agreement with them to buy the building to house the restaurant, and to lease it out as commercial space.

Then they had to get financing for renovations and startup costs. 

Few Financing Options

Most mainstream banks are leery of financing enterprises in rural Alaska, which are considered high risk. Many state programs and nonprofits that provided loans to rural businesses during the 1980s and early 1990s were shut down because of budget constraints, says David Hoffman, CEO of Alaska Growth Capital, an Anchorage-based “alternative financing” program. At the same time national corporations that were not familiar with the rural Alaska market purchased some major Alaska banks.

Alaska Growth Capital was launched to help fill the gap. In 1996, the Alaska Science and Technology Foundation announced that it would provide a $3 million loan to provide seed capital for the establishment of Business and Industrial Development Corporations or BIDCOs, Hoffman says. AGC was selected to receive the funds and opened in 1997 as a wholly owned subsidiary of Arctic Slope Regional Corp.

Alaska Growth later received additional capital from ASRC, the U.S. Treasury Department and the Denali Commission. In return for government funds, Alaska Growth had to provide assurances that it would provide a certain minimum level of loans each year to economically distressed parts of the state, Hoffman says.

Hugh Short approached Alaska Growth Capital with his Subway and commercial lease proposal and sparked their interest.

“It’s something new and different in rural Alaska,” Short says of the sandwich and salad franchise. “With the value of the property we had out there, we were pretty bankable. We got a little bit of cash to do the renovations and get some tenants in and now we’re in business.”

The Shorts aren’t alone. Since its inception, Alaska Growth Capital has financed dozens of businesses worth millions of dollars all across the state. Businesses include value-added fish-processing companies; retail businesses, such as community stores in Galena and Nome; and restaurants, such as one in Kotzebue and the Subway of Bethel. Doing business in rural Alaska is different than in more urban areas, Hoffman says.

“Rural Alaska businesses serve limited and isolated markets,” he says. “As such, they face logistical challenges that urban businesses don’t. Also, business is much more personal in the rural areas with business owners typically knowing most of their customers on a personal basis.”

A Good Deal

Alaska Growth Capital, alone or with banks in joint financing, can provide financing for ventures from $100,000 to $10 million, according to the AGC Web site. It targets businesses that expand Alaska’s economy, especially in manufacturing, resource development and service providers. AGC can also make venture capital investments in certain cases.

“They’re doing a good job,” says Paul McIntosh of the Denali Commission, which was formed by U.S. Sen. Ted Stevens, R-Alaska, in 1998 to direct federal funds to distressed communities and help develop infrastructure and business opportunities. “They’re doing a lot more work in distressed rural communities.”

Earlier this year, AGC received $35 million from the Treasury Department through the New Market Tax Credit program. The national $15 billion program uses the tax breaks to boost private investment in low-income communities. They pass the tax breaks on to private lenders, and use the proceeds to pay for capital development for businesses in rural areas.

It’s an important link between the government and the business community.

“The government doesn’t do economic development well,” McIntosh adds. “It’s something for the private sector.”

Government programs provide opportunities for many rural businesses and provide the financial assurance that makes such investments attractive to mainstream banks, such as KeyBank and Wells Fargo, which both have active programs in rural Alaska.

According to a 1999 study by the Small Business Administration and the Wall Street Journal, two-thirds of all small businesses will fail within the first five to eight years of operation. The remoteness of many Alaska communities can add other risks.

“In rural Alaska, the absence of power and transportation infrastructure makes it really challenging,” says James Cloud, Wells Fargo senior vice president in charge of business banking in Alaska. “There’s a lack of a skilled, educated work force. While it’s a little better than it was 25 years ago, there’s still a long way to go. Not enough kids are graduating from high school. Too many are dropping out.

“A businessman in rural Alaska can’t get local employees; he has to bring in workers from Outside, which is expensive. It’s even a struggle for us, where we have stores in places like Kotzebue,” Cloud says.

However, if a business is economically viable and the owners demonstrate the management skills to run it, Cloud says credit enhancement programs through the U.S. Department of Agriculture and the Bureau of Indian Affairs can help bridge the collateral gap.

“Then that’s where the loan-guarantee program comes in,” Cloud says. “If you didn’t make it, it would probably be hard for us to sell it.”

Alaska Growth Capital and the federal Small Business Administration also provide training in writing business plans, budgeting and bookkeeping, and provides other technical assistance.

“Projects in these areas don’t have a good history of record keeping,” McIntosh says. “It helps keep the person in business and helps loan repayment. They have a very low default rate.”

Hoffman agrees.

“We have not yet had a rural loan go bad, although we have had Anchorage loans go bad,“ he said by e-mail. “Rural business owners tend to have long-term ties to their communities and are in business for the long run. This long-term commitment mitigates risk.”

On the other hand, when a business really takes off, financial doors open.

Fish for the Taking

When the salmon fishing industry slumped seven years ago, Mike Scott decided the only way to make ends meet was to directly market his gourmet fresh and smoked salmon to stores and restaurants in the Lower 48. He started Copper River Fine Seafood in his garage with help from Alaska Growth Capital.

Scott turned to AGC because “the big banks, if you’re in fishing, they don’t want to know you,” says Copper River Fine Seafoods general manager Joe Egemo. “They’ve lost so much money in the last 10 years.”

Scott’s business boomed. Three years ago, his company grew 100 percent, with 50 percent growth the past two years, says Egemo. Today, it’s a $38 million company that has spurred many other fishermen to sell their salmon directly to stores and restaurants. And the big banks have taken notice.

Scott’s business finances have been consolidated through KeyBank. “Basically, KeyBank has really been a savior,” says Egemo.

Other programs specialize in financing Alaska Native enterprises.

The National Cooperative Bank was chartered by Congress in 1978 to help cooperatives and member-owned organizations across the United States obtain financing, says Vice President Michael Novak. The tribal organizations and the corporations formed under the Alaska Native Claims Settlement Act of 1971 fall under their purview. NCB was privatized in 1981 as a member-owned cooperative.

NCB/Alaska has worked on projects from small loans in the Aleutians to renovate buildings to financing a garment manufacturing operation in Puerto Rico for a subsidiary of Sitnasuak Native Corp., the village corporation for Nome.

Since 1984, NCB/Alaska has approved or arranged more than $350 million in financing to nearly 50 Native Alaska enterprises. “The simple fact is that no other bank has been serving Native corporations as long as we have,” Novak says in the NCB Spring 2004 newsletter.

Based in Washington, D.C., National Cooperative Bank maintains an office in Anchorage that focuses on serving Native Alaskan enterprises, Novak says. The head of the Anchorage office, Leo Barlow, has special insight into the needs of the Native corporations, Novak says. Barlow, a Native Alaskan, is a former CEO of Juneau-based Sealaska.

Other tribal entities have turned to government programs to finance often-unorthodox projects.

Bison Near Delta Junction

Stevens Village, a community of about 85 people on the Yukon River 78 miles northwest of Fairbanks, was interested in raising plains bison for meat. They hoped to buy land near Delta Junction and import about 15 bison using a program administered by the U.S. Department of Agriculture.

The Indian Tribal Lands Acquisition Program was authorized under the 2002 Farm Bill, according to Chad Padgett of the Farm Service Agency in Palmer.

“The intent of the program is essentially to allow tribal governments and tribal entities to acquire land that they may have lost through low-interest loans and to establish indigenous species on the land,” Padgett says.

Padgett said the loan staff worked with Stevens Village for several months, making sure the project was viable and outlining the program’s requirements to the village.

“One of the things we do, is we run supervised credit programs,” Padgett says. “The intent of that is to help them gain credit and then eventually graduate from our credit system.”

The village’s business plan was deemed sound and Stevens Village received a $775,000 loan to buy 2,080 acres of land in Delta Junction for the bison.

The Stevens Village project was the first in Alaska, the sixth one done nationwide, Padgett said. It was also the largest project. “Typically we don’t make loans that are that big,” Padgett says.

For the Shorts, operating a successful business in a remote location has had its ups and downs. Having to fly in all their supplies through bypass mail has meant frozen produce in the winter and bread dough that has warmed and started to rise in the summer. Finding employees has been difficult, although Hugh Short says they have a core of loyal, reliable workers that they can depend on.

Despite the difficulties, Short says he would do it again.

“It’s been a learning experience and it’s been a challenge, but it’s actually been pretty rewarding to bring a worldwide franchise to rural Alaska,” he says. “There’s a certain bit of satisfaction with doing that for your community.”

While ABM tries to achieve fair and balanced reporting, there are more than 1,600 business licenses issued in Alaska for finance and insurance, identified by the State of Alaska. We do our best to use a variety of sources throughout the year in different articles.

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