From the January 2002 issue of Entrepreneur

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 entrepreneurial 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 IDA bonds) have been around since 1980, when Congress created them to help spur the development of manufacturing companies by providing them with capital at rates below what they could get from commercial banks. In 1999, IDBs, previously considered an option for only large companies seeking multimillion-dollar loans, got a sleek new look with the creation of the mini-bond program, which offers a streamlined application process, capped fees and quick closings.

"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 municipal and development finance. According to Traxler, entrepreneurs still view bond financing as it was prior to tax legislation in 1986 and before the mini-bond concept: a long, costly process demanding the deployment of a full set of legal and tax advisors to handle the transaction. Today, the IDB process is less painful, and loans are now available for established entrepreneurs looking to borrow between $500,000 and $1.5 million to expand their facilities and operations.

"With the mini-bond program, for the first time since IDBs were created, I can show a potential borrower an IDB financial analysis that makes a lot more sense than a traditional commercial loan," says Rick Palank, director of the St. Louis County Economic Authority in Missouri, one of the first offices to implement a mini-bond program. While the costs associated with processing and issuing tax-exempt bonds in general are greater than a bank loan because of the relative complexity of such a transaction, those costs are either reduced or omitted altogether in the mini-bond program. Palank points out that the streamlined application process also frees up entrepreneurs' time. "If it's properly planned," says Palank, "we should be able to close the deal in about the same time as it takes to close a bank loan."

Options Package

Another major advantage of IDB mini-bond financing is flexibility in repayment terms. "Sure, my mini-bond gave me the money I needed for expansion, but it also allowed me to pay over a much longer period of time than any commercial bank would allow," says Golterman.

The Finance Authority of Maine, which has followed the St. Louis mini-bond model, offers IDB borrowers a choice of amortization terms and payment structures. "That is particularly important given the current business climate, where keeping debt service under control is a priority," says David Markovchich, director of business development for the Authority. "Cash flow is particularly important to manufacturers in a down cycle."

On the Make

Even with mini-bonds' new flexibility, IDBs are not for everyone. In general, if your company is a manufacturer or a processor of tangible personal property, and if your project involves the acquisition or construction of assets related to manufacturing or processing (such as the purchase of land or equipment), then you are eligible.

Don't assume from looking at these constraints, however, that you're automatically ineligible if you don't obviously fall into one of the listed categories. You might be surprised who is considered to be a manufacturer. Palank tells the story of a phone call he received from an entrepreneur who "manufactured" ice. Skeptical, Palank checked around and found out that the ice-making entrepreneur did indeed fall under the manufacturer classification and was therefore eligible to be an IDB borrower.

Remember, however, that although the mini-bond program is geared to entrepreneurs, you're still expected to present the traditional touchstones of creditworthiness: a strong balance sheet, adequate collateral and acceptable loan-to-value ratios.

Bonding Experience

The process of obtaining a mini-bond can be broken down roughly into three phases. First, the economic agency pre-qualifies the potential borrower for eligibility and to ensure that the total project costs the loan will be put toward are consistent with the established IDB rules. The agency and the entrepreneur then structure loan terms that fit the individual project costs. For example, some companies may prefer to receive the loan proceeds in three increments instead of in a lump sum. In that case, the loan is structured so the entrepreneur pays interest only on the amounts expended to date.

The second phase, known as "application and inducement," requires the potential borrower to fill out an application packet that provides the agency with details of the project costs, the company's financial stability and other information that's traditionally passed between lender and borrower. The economic development agency then seeks formal approval by a government unit to issue the bond that generates funds for the project. Each state has its own set of procedures and requirements companies must meet to receive a bond allocation. The state authority may evaluate your project based on the creation of new jobs, retention of existing jobs, the expansion of the real estate tax base or other criteria.

In the final phase of the process, the closing, the bond proceeds are typically transferred into an escrow account and drawn down as the company needs them. Interest earnings on the escrowed funds accrue to the benefit of your company.

Even with the mini-bond program, the IDB process is not the easiest financing method for a business owner to navigate. But according to Golterman, it passes the entrepreneurial acid test. "The process did take persistence on our part," he says. "But the bottom line is I have the best loan package available-200 basis points less than any bank in town and great repayment terms."


Sean P. Melvin is an author, attorney and assistant professor of business at Elizabethtown College in Elizabethtown, Pennsylvania.

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