Financing Incentives for Your Business
By
James H. Renzas
President and CEO
Location Management Services, LLC
Mission Viejo, CA
Before the competition for prime industries became intense enough for states, cities and other municipal organizations to offer incentives, there was a very limited number of ways to finance a business expansion. The business would either withdraw money from retained earnings or borrow from a bank.
Today there are many new ways to finance an expansion. States and communities now work to help finance business expansion as an investment that will provide tax revenues and create new jobs. Smart businesses that want to expand will investigate and leverage these benefits to help increase growth.
In order to take advantage of these new financing mechanisms, businesses must get a loan review committee that is both creative and innovative. It is also helpful if the committee understands how the business expansion or relocation will generate additional revenues to repay the loan.
Here are a few of the ways local and state governments can help to finance business expansion.
Industrial Revenue Bonds are available in every state for manufacturers and processing oriented companies looking for money to expand their facilities. These can be used for real estate acquisition, new construction, additions, machinery purchase and other activities that improve production capacity.
Industrial Revenue Bonds are generally issued by the state or local government, but are technically obligations of the end user and carry a tax-exempt interest rate at the federal, and sometimes, state level. This generates a very favorable source of borrowing which can be one or two percentage points below the prime rate.
An important thing to remember is that the company can issue no more than 10 million in bonds per project, and no more than 40 million collectively at any one time. In addition, the company cannot have capital expenditures in excess of 10 million for three years following the issuance of the bonds. In many cases, this limits the usefulness of this form of finance.
For example, Vorwood Co. is a Shasta-county based machine manufacturer that sells to mobile home companies and cabinet-makers in the United States and internationally. Seeking to expand its facilities, Vorwood sought the help of the Economic Development Corporation of Shasta County. Shasta County succeeded in assisting Vorwood in accessing grant funds from the state of California. Vorwood used these funds to purchase additional land and build a new facility on property adjacent to its current location.
This co-effort by Shasta County EDC and the City of Anderson to assist in finding state funding kept Vorwood from leaving California. The company was investigating a move at that time to another state, which had offered a loan package with payment not beginning until sometime in the future.
Revolving Loan Funds
Many communities have established Revolving Loan Funds that are generally available to smaller businesses. These funds offer varying provisions and restrictions.
Some communities will provide a low interest loan from these Revolving Loan Funds for the acquisition of machinery and equipment. Others will offer Revolving Loan Funds for the construction or remodeling of new facilities. Sometimes these funds are even available for working capital needs for expanding businesses.
Generally, Revolving Loan Funds are limited in size to less than $100,000 in principal and have repayment periods of three to five years.
For many years, the Economic Development Administration (EDA) provided grants to communities to establish revolving loan funds. Many communities have established programs to assist expanding businesses with below prime expansion capital.
Some communities have constructed speculative buildings in the hope of attracting new or relocating companies to enhance the vibrancy of their communities. These speculative building programs are usually built with community or state dollars and have the advantage of flexibility in terms of usage, lease rate or term.
The major benefit to the community is not the profit made on the development of real estate, but on the taxes and income the new job creation will have on other community activities. Thus, negotiations with speculative building community leaders will tend to focus on the investment and tax benefits as opposed to lease rate benefits.
Other economic development players can also be used as sources of funding for new or expanding businesses. A number of states have set up separate entities to fund these programs, I-Bank in California, the Texas Economic Development Bank, and the Mississippi Business Finance Corporation for example.
The Tennessee Valley Authority, as another example, operates a highly successful business loan program to help companies purchase new equipment and buildings to expand jobs and investment in its Service Territory.
In addition, utilities, short line railroads, municipal sewer and water districts are often a source of financing that is frequently overlooked by expanding companies.
Another way that state and local
governments can assist expanding businesses is through the use of loan
guarantee programs.
Loan guarantees allow the borrower
to obtain lower cost funding for real estate or equipment purchases by
guaranteeing the repayment of all or a portion of the loan. This allows the business to obtain credit
where it may not have qualified on its own or would have obtained a much lower
interest rate.
For example, the Commonwealth of Pennsylvania operates the Capital Access Program, a loan guarantee program targeted to all businesses with capital needs. Proceeds of the loan can be used for land and buildings, equipment and working capital. Loans for up to $500,000 can be term or line of credit. Rates and terms are negotiated with the participating bank.
More states and local communities than the untrained eye would see have established grant programs that can be leveraged to help finance business expansion and relocation projects.
Texas recently funded the Texas Enterprise Fund with over $200 million in discretionary capital to help offset start-up costs associated with major investment programs. The Toyota Tundra truck plant in San Antonio benefited from this fund.
Other community funds can be leveraged to lower off-site infrastructure costs. One such find is the federally-funded Community Development Block Grant (CDBG) program or the Economic Development Administrations Title IX public improvement grant program.
Often communities have raised funds that can be used for economic development projects that will create jobs and taxes in their communities. An example of this is Maryland’s Smart Growth Economic Development Infrastructure Fund (One Maryland). This fund promotes the creation of industrial parks and other needed infrastructure in qualified distressed counties through direct funding of projects identified in the local strategic plan for economic development.
Some states and communities offer
micro-loans – small loans to help new businesses with expansion capital. Sometimes these programs are run in coordination
with the Small Business Administration, which works with financial institutions
to obtain credit where it may not ordinarily be available.
The South Dakota Development Corporation (statewide CDC) offers long-term, fixed-rate subordinated financing via the SBA 504 loan program. The 504-loan program can finance land, new construction, buildings, and equipment with a useful life of at least 10 years. This program can finance up to 40 percent of total project costs up to $1.3 million in some instances.
Another commonly utilized financing tool is the use of Tax Increment Financing for lowering the start-up costs associated with corporate expansion.
Tax Increment Financing is a technique of financing that is found in almost all states. It involves the recapture of sales or property taxes to repay loans or bond obligations incurred to pay for on or off-site improvements, which then generate the taxes through economic activity.
Many sports stadiums, such as the Staples Center in Los Angeles have utilized this technique for creating something out of nothing. Very often projects must be located in special zones, such as a Redevelopment Zone or an Economic Development Zone in order to qualify for this program. These zones can be expanded or newly created if a project is attractive enough for a new community.
Some communities and states have established programs to assist with the start-up of new businesses in technology industries that they would like to encourage development.
These communities will often partner with local universities to create business incubator programs where research and production space, shared services and other business needs are subsidized. These programs allow technology intensive businesses to concentrate their resources on research and development as opposed to the rather mundane tasks of accounting, finance and real estate.
No matter where a business is seeking to expand, it is likely that one or more of these programs or programs like these will be available to help. Businesses must explore the options by finding out what is available before committing to a specific financing path.
The local economic development board, banker and city manager are often great sources to help determine what programs are available to an expanding business. Another good option is to hire a specialist. An incentives consulting firm, like Location Management Services, specializes in knowing what is available on the local and state level to help companies lower expansion costs.
LMS provides a single point of contact with expertise in garnering incentives, local knowledge and relationships all over the United States, familiarity with recent legislation and compliance issues and a long term ability to track and file appropriate paperwork. This will ensure the ongoing delivery of incentives and financial rewards based on the incentives generated.
LMS will negotiate, manage, track and execute incentive programs as their sole function. There is little or no cost to the company because they are paid only on a successful performance. Often this is money that the company never would have received without their services anyway so the company can’t lose.
James Renzas is President and CEO of Location
Management Services, LLC (www.locationmgmt.com), a Mission Viejo, CA-based site
selection firm that specializes in negotiating financial incentives and tax
credits for Fortune 500 companies. Mr.
Renzas has been helping companies find competitive sites in the United States
for more than 25 years and holds an advanced degree in economic geography. He can be reached at (949) 472-4482 or jrenzas@locationmgmt.com.