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.
- Council of Development Finance Agencies
(740) 597-1477, www.cdfa.net
- Finance Authority of Maine
(207) 623-3263, Dmarkovich@fam.com
- St. Louis County Economic Council
(314) 615-7667, Richard_Palank@stlouisco.com
- Golterman & Sabo
(636) 225-8800, www.golterman.com