Itsy-Bitsy 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."

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This article was originally published in the January 2002 print edition of Entrepreneur with the headline: Itsy-Bitsy Bonds.

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