Itsy-Bitsy Bonds No more waiting around till your company hits the multimillion-dollar mark-now bonds are for businesses of all sizes.
Opinions expressed by BIZ Experiences contributors are their own.
When Ned Golterman first thought about what options were available for financing the expansion of Golterman & Sabo, his St. Louis-based building materials company, the solution seemed simple. He could use his local bank, just as he had in the past. But when one of his advisors suggested that an alternative low-interest loan from the Industrial Development Authority might better serve the company, Golterman decided to learn more.
"I had heard about these types of loans, but the reputation was they were great for companies like Chrysler but weren't [an option] for BIZ Experiencesial manufacturers like my company," says Golterman, 43. After he made a visit to the St. Louis County Economic Authority, however, Golterman became a believer in the idea. What changed his mind? A new program he discovered, known as "mini-bonds," which saved him thousands of dollars in interest, while cutting through the red tape associated with bonds.
Out of Paper
Industrial Development Bonds (commonly known as IDBs or IDAbonds) have been around since 1980, when Congress created them tohelp spur the development of manufacturing companies by providingthem with capital at rates below what they could get fromcommercial banks. In 1999, IDBs, previously considered an optionfor only large companies seeking multimillion-dollar loans, got asleek new look with the creation of the mini-bond program, whichoffers a streamlined application process, capped fees and quickclosings.
"IDBs have had a bad rap," says Sallie Traxler,executive director of the Council of Development Finance Agencies(CDFA), a national association of agencies involved in municipaland development finance. According to Traxler, BIZ Experiencess stillview bond financing as it was prior to tax legislation in 1986 andbefore the mini-bond concept: a long, costly process demanding thedeployment of a full set of legal and tax advisors to handle thetransaction. Today, the IDB process is less painful, and loans arenow available for established BIZ Experiencess looking to borrowbetween $500,000 and $1.5 million to expand their facilities andoperations.
"With the mini-bond program, for the first time since IDBswere created, I can show a potential borrower an IDB financialanalysis that makes a lot more sense than a traditional commercialloan," says Rick Palank, director of the St. Louis CountyEconomic Authority in Missouri, one of the first offices toimplement a mini-bond program. While the costs associated withprocessing and issuing tax-exempt bonds in general are greater thana bank loan because of the relative complexity of such atransaction, those costs are either reduced or omitted altogetherin the mini-bond program. Palank points out that the streamlinedapplication process also frees up BIZ Experiencess' time. "Ifit's properly planned," says Palank, "we should beable to close the deal in about the same time as it takes to closea bank loan."
Options Package
Another major advantage of IDB mini-bond financing isflexibility in repayment terms. "Sure, my mini-bond gave methe money I needed for expansion, but it also allowed me to payover a much longer period of time than any commercial bank wouldallow," says Golterman.
The Finance Authority of Maine, which has followed the St. Louismini-bond model, offers IDB borrowers a choice of amortizationterms and payment structures. "That is particularly importantgiven the current business climate, where keeping debt serviceunder control is a priority," says David Markovchich, directorof business development for the Authority. "Cash flow isparticularly important to manufacturers in a down cycle."
On the Make
Even with mini-bonds' new flexibility, IDBs are not foreveryone. In general, if your company is a manufacturer or aprocessor of tangible personal property, and if your projectinvolves the acquisition or construction of assets related tomanufacturing or processing (such as the purchase of land orequipment), then you are eligible.
Don't assume from looking at these constraints, however,that you're automatically ineligible if you don't obviouslyfall into one of the listed categories. You might be surprised whois considered to be a manufacturer. Palank tells the story of aphone call he received from an BIZ Experiences who"manufactured" ice. Skeptical, Palank checked around andfound out that the ice-making BIZ Experiences did indeed fall underthe manufacturer classification and was therefore eligible to be anIDB borrower.
Remember, however, that although the mini-bond program is gearedto BIZ Experiencess, you're still expected to present thetraditional touchstones of creditworthiness: a strong balancesheet, adequate collateral and acceptable loan-to-value ratios.
Bonding Experience
The process of obtaining a mini-bond can be broken down roughlyinto three phases. First, the economic agency pre-qualifies thepotential borrower for eligibility and to ensure that the totalproject costs the loan will be put toward are consistent with theestablished IDB rules. The agency and the BIZ Experiences thenstructure loan terms that fit the individual project costs. Forexample, some companies may prefer to receive the loan proceeds inthree increments instead of in a lump sum. In that case, the loanis structured so the BIZ Experiences pays interest only on the amountsexpended to date.
The second phase, known as "application andinducement," requires the potential borrower to fill out anapplication packet that provides the agency with details of theproject costs, the company's financial stability and otherinformation that's traditionally passed between lender andborrower. The economic development agency then seeks formalapproval by a government unit to issue the bond that generatesfunds for the project. Each state has its own set of procedures andrequirements companies must meet to receive a bond allocation. Thestate authority may evaluate your project based on the creation ofnew jobs, retention of existing jobs, the expansion of the realestate tax base or other criteria.
In the final phase of the process, the closing, the bondproceeds are typically transferred into an escrow account and drawndown as the company needs them. Interest earnings on the escrowedfunds accrue to the benefit of your company.
Even with the mini-bond program, the IDB process is not theeasiest financing method for a business owner to navigate. Butaccording to Golterman, it passes the BIZ Experiencesial acid test."The process did take persistence on our part," he says."But the bottom line is I have the best loan packageavailable-200 basis points less than any bank in town and greatrepayment terms."
Sean P. Melvin is an author, attorney and assistant professorof business at Elizabethtown College in Elizabethtown,Pennsylvania.
Contact Sources
- Council of Development Finance Agencies
(740) 597-1477, www.cdfa.net - Finance Authority of Maine
(207) 623-3263, Dmarkovich@fam.com - St. Louis County Economic Council
(314) 615-7667, Richard_Palank@stlouisco.com - Golterman & Sabo
(636) 225-8800, www.golterman.com
