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.