In your grandparents' day, a business that needed financing for an expansion project went to the bank, or tried to attract investors. Many still do, of course, but as competition for projects has grown in intensity between states and communities, most units of government have developed some sort of financing apparatus to ensure that business expansions - with all their promises of jobs and an expanded tax base - go forward.
Affordable Financing Opportunities
The availability of such funds has opened up new opportunities for growing companies to finance their expansions, often in ways that would not have been affordable in the past.
"It's simply the access to the cheapest available financing," says Michael Manica, president of United Bank of Michigan. "The borrower, whomever the borrower may be, doesn't care where his money comes from, whether it's from a bank or a private equity investor or the investment market. All he's interested in is cost to term."
And units of government can significantly reduce the cost of borrowing by raising and allocating capital in ways venture capitalists and private-sector banks cannot. They can issue bonds, often tax-free. They can create special financing districts that capture the tax revenue of all taxing units to devote to financing a development project. And if they can get enough political support, they can simply go ahead and allocate money from their general funds - either to loan to a company or, in some cases, to offer as a straight grant.
These organizations are often quasi-public - created by state legislatures but operating on a largely independent basis, with only nominal state funding. Such is the case with MassDevelopment in Massachusetts, and with the Texas Enterprise Fund (TEF). Such organizations may provide anything from tax breaks or job training funds to actual financing (usually loans but sometimes out-and-out grants), which can come in the form of bonds, such as tax-exempt municipal bonds or industrial revenue bonds.
In its most recent annual report, MassDevelopment reported having provided $19 million in industrial financing during 2009. Its largest single investment came in the form of a $10 million, tax-exempt industrial bond used to finance FIBA Technologies' purchase and installation of a new forge, heat treat furnace, and boring machines at is Millbury, Mass., facility. FIBA reported the new equipment would facilitate the creation of 42 jobs.
Similarly, in Texas, Caterpillar is developing a new, 600,000-square-foot facility in Victoria to make hydraulic excavators. The company expects to create 500 jobs at the site.
The $1.175 million invested by the Texas Enterprise Fund won't come close to funding the entire $150 million Caterpillar project. But Texas considers the TEF a "deal-closing fund," and requires the approval of the governor, the lieutenant governor, and the speaker of the House before funds can be allocated.
Texas looks at factors including capital investment, job creation, wages generated, financial strength of the applicant company, and various other measures when considering an application for TEF funds, which can come in the form of either loans or grants.
Differences Between Traditional and Alternative Financing
So what are the differences between traditional financing and alternatives backed by states and other units of government? They are various but usually have two things in common: (1) they reduce the cost of borrowing for the company looking to develop the project; (2) they put more of the risk involved with any potential write-off onto the public-sector entity.
Governments accept that risk as a trade-off in order to facilitate economic development. The state and/or community will receive ample benefit from the creation of jobs and a larger tax base to absorb the occasional loss. Janet Hookailo, a spokesperson for MassDevelopment, says her organization has had to accept 15 write-offs of projects since it was established in 1993.
"But we operate along the model of an investment bank, if you will," Hookailo says. "We weight our loans. We reserve against loans. We make asset-backed loans."
Not all public money provided to companies comes in the form of loans. The state of Michigan recently allocated more than $29 million in grants from its 21st Century Jobs Fund to 17 companies, which were chosen based on the nature of their expansion plans, the number jobs they were creating, and the nature of their businesses. The list of companies that received the money was heavily weighted with firms involved in green energy and biotechnology.
One recipient, Ann Arbor-based Arbor Photonics, received $1.5 million, which it coupled with an equal amount to create 136 new jobs and continue work on commercializing its optical fiber structure, which is known as Chirally-Coupled Core Fiber, or 3C fiber.
"We're developing some very advanced technology," says Phillip Amaya, CEO of Arbor Photonics, who added that he had already hired a director of business development and hoped the company could hit $50 million in annual sales by 2014.
Creation of a New Lending Market
States get into this business to support economic development of course, but in the process they can also position themselves as competition for their own banks. According to one Michigan banker, however, states and the entities they create for this purpose are often supporting different projects than those that would receive financing from banks.
"The principle risk concerns the value that the company can pay you back," says United Bank of Michigan's Manica. "That is a real risk, and the states sometimes are willing to take a higher risk."
And in many ways, Manica says, states and their economic development entities are creating a new lending market rather than horning in on the one owned by banks.
"From a community bank's standpoint, we would have had very little request for this type of financing before," Manica says. "We did have some, and now we have none. There's no tax advantage because the cost of entry into that field is so high, and in this low-interest-rate environment, there simply is not enough savings to make it worthwhile. The time involved is far too long."
That's where the ability of governmental units to issue bonds - sometimes, but not always, tax-free bonds - becomes crucial to their ability to finance projects. Industrial revenue bonds, in particular, make sense for projects requiring a large amount of financing because many states will still allow them to be tax-free if they are for manufacturing. And economies of scale for such large projects make legal fees and other administrative costs manageable.
Manufacturers who think they can benefit from financing from - or supported by - a public source should check the economic development pages of their states' or local communities' websites to see what kinds of programs are available and to find out how to qualify.