"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.