Alternate Financing Routes
When David Nadeau and his partner, Rick Edwards, went looking for financing this time last year, they had several goals: to buy out their primary investor and become co-owners of their Portsmouth, Rhode Island, manufacturing company, Renova Lighting Systems Inc.; to get short-term working capital for the company's operations; and to secure long-term financing to upgrade outdated manufacturing equipment and grow the business. In their search, they heard about Job Bank, a state partnership with Citizens Bank that offered a low interest rate to businesses that agreed to add jobs, but it didn't look like the program would be renewed for 2006. So, they decided to go with a traditional loan at a higher rate and with more restrictive terms.
"Literally a day before the closing, we got a call from the bank saying the program was back on," says Nadeau, 42. "It was a really nice, last-minute boost for us." The bank offered to swap the paperwork, so Nadeau and Edwards got the Job Bank financing, which offered an interest rate of just under 5 percent on a five-year loan for $300,000. And they were not restricted in how they used the money, a change from the traditional term loan. The hitch? The pair had to agree to add seven jobs during the next three years. "That was already built into our longer-term plan," Nadeau says. "It just might have happened later."
Rhode Island is one of many states offering financing programs tied to job growth. For example, through a partnership between PNC Bank and the New Jersey Economic Development Authority, business owners can get loans for as little as $100,000 and still get the five-year treasury rate, around 4.5 percent, says Tom Nist, senior vice president and manager of the small-business segment at PNC Bank. "So if you [are] a business in New Jersey or [are thinking] about locating in this area and need to do real estate development, now you can borrow at the treasury rate. That's a dramatic departure from borrowing at an SBA kind of rate. And frankly, it turns a little quicker."
Not all state programs are known for their loan processing efficiency, but in general, they can offer significant benefits to entrepreneurs seeking cash to grow, including lower rates, flexible conditions and access to sizable sums. Often, they enable banks to take on riskier loans for entrepreneurs who might not otherwise qualify for traditional financing. "And some loans have a lower down payment requirement," points out Donna Holmes, director of the Penn State Small Business Development Center in University Park. "The bank may do 50 percent, the state program another 40 percent, and the borrower only has to come up with 10 percent; with a straight bank loan, the bank might be looking for 20 percent or 25 percent."
Through the Colorado Housing and Finance Authority, which makes loans for equipment and real estate primarily to businesses with a few years under their belts, borrowers may ante up as little as 15 percent, and they can get loans of up to $20 million and terms of up to 20 years. "[It] makes capital available to businesses that can't readily get those funds," says Alice Kotrlik, division director of the Colorado Office of Economic Development and International Trade in Denver.
Because state programs vary widely, with some designed to boost certain industries and others to inspire the achievement of certain goals, you will need to find a program that agrees with your business' specific objectives. If you try forcing a business strategy to qualify for a loan, you could wind up with a penalty and a much higher interest rate. Nadeau isn't concerned about that, noting that his company, which projects sales of $10 million for 2007, has already hired nearly half of the quota necessary to fulfill its obligation. The cash infusion has allowed him and Edwards, 45, to purchase the new equipment, and they already have a financing commitment for a real estate purchase to move the business to a bigger location. Says Nadeau, "I expect that we will be growing at a steady pace."
C.J. Prince is a New York City writer specializing in business and finance.