Cash to Expand May Be at Hand

Obtaining funds to expand does not have to be a difficult and frustrating experience for metal center operators. In fact, acquiring money for business expansion should be far easier than obtaining start-up or operating financing. The secret lies in using the service center operation’s track record of profits and growth, its credit history, cash flow and financial statements as tools when seeking expansion funding. Of course, looking in the right place also helps.

Bond sales method
A bond represents a method of long-term borrowing utilized by incorporated metals distribution businesses or government agencies. While there is no reason a smaller metal center or business cannot look to bonds as a source of expansion capital, a less expensive and more fruitful path involves piggybacking on bonds issued by someone else—usually a state or municipal agency.

Industrial Development Bonds (often referred to as IDBs or IDA bonds) have been around since 1980, when Congress created them in order to spur the development of manufacturing companies by providing capital at rates below what they could get from commercial banks. In 1998, IDBs, previously considered an option for only large companies seeking multi-million dollar loans, got a sleek new look with the creation of the mini-bond program, a program that offers a streamlined application process, capped fees and quick closings.

Despite mini-bonds’ new flexibility, especially in repayment terms, 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.

Even with the mini-bond program, the IDB process is not the easiest type of financing for a service center owner to navigate. It does, however, provide an alternative source of expansion funding—low-interest loans from the Industrial Development Authority.

Local economic development
Local municipal, regional and state economic development agencies provide another, often-overlooked source of expansion financing. Local agencies provide everything from training to help in securing local government contracts. They can also be a source of loans for small businesses. In some cases, the money will come directly from the local economic development agency, but more often the local agency provides a referral to local lenders or investors.

Local aid is available since cities and regions are interested in promoting the area’s economic health and creating or retaining jobs. Sometimes, the toughest part about getting such help is finding what programs are available or who to ask about them.

A good place to begin this search is with the local Chamber of Commerce, particularly for existing businesses. Contacting the state’s economic development organization or hooking up with such national organizations as the Council for Urban Economic Development (part of the International Economic Development Council,  www.iedconline.org) can prove fruitful. Small businesses may also find local economic development groups or agencies on the Internet.

Enterprise Zones
Since 1980, more than 25 states have established programs to designate Enterprise Zones, offering tax breaks and other incentives to businesses that locate in certain economically disadvantaged areas. To be eligible for any of these incentives, businesses must generally meet certain criteria such as creating new jobs in a community.

The purpose of an Enterprise Zone or EZ is to promote job growth and to help municipalities take advantage of business expansion opportunities when they arise. EZs improve the capacity of local governments and business communities by encouraging them to form public/private partnerships. In turn, these partnerships boost business investment within the zone. Increased business investment, job creation and sustained community self-sufficiency are the primary goals of the Enterprise Zone program.

Within the Zone, revolving loan funds are established, supported by competitive grants-to-loans of up to $500,000 per project. Zone participants also have access to the lowest interest rates offered by many state economic development agencies and organizations. In some areas, businesses may also qualify for low utility rates or low-interest financing from eligible government jurisdictions.

Of course, local loans must be collateralized with reasonable security. EZ competitive grants-to-loans can be used for up to 30 percent of the total project investment to acquire machinery and equipment. They are available for new business construction or building improvements, site improvements, infrastructure and, in some special cases, for up to 40 percent of inventory or working capital needs. Competitive grants-to-loans can also be used toward the cost of preparing business lease space, especially for facilities with fiber optic wiring. Competitive grants may not exceed 30 percent of total project investment and one full-time job must usually be created or retained for each $30,000 borrowed.

Community Renewal Initiative
The Department of Housing and Urban Development offers a program, the Community Renewal Initiative for Renewal Communities and Urban Empowerment Zones. Under the program, tax incentives worth approximately $5.6 billion are available to eligible businesses of all sizes in Renewal Communities.

The incentives include employment credits, a 0 percent tax on capital gains, accelerated depreciation through Commercial Revitalization Deductions and other incentives, which are designed to encourage businesses to open, expand and hire local residents. Empowerment Zone incentives include employment credits, low-interest loans through EZ facility bonds, reduced taxation on capital gains and other incentives.

(More information is available online at www.hud.gov/offices/cpd/
economicdevelopment/programs/rc/index.cfm.)

New Markets Tax Credits
Another federal program, the New Markets Tax Credit Program, was designed to stimulate investment and economic growth in low-income urban neighborhoods and rural communities by offering a seven-year, 39 percent federal tax credit for Qualified Equity Investments made through investment vehicles known as Community Development Entities. CDEs use capital derived from the tax credits to make loans to or investments in businesses and projects in low-income areas.

First enacted in 2000 as part of the Community Renewal Tax Relief Act, the original legislation provided $15 billion in New Markets Tax Credit Authority. In 2000, Congress provided an additional $1 billion in credits targeted to communities in federally designated “GO Zones” devastated by Hurricane Katrina. In December 2006, Congress passed the Tax Relief and Health Care Act of 2006, which extended the credit through 2008 with an additional $3.5 billion in credit authority.

By all indicators, the NMTC is working. NMTC investments in low-income communities currently total over $7.7 billion, and over 200 CDEs are using the credit to support a wide variety of community and economic development initiatives. A list of CDEs is available from the Community Development Financial Institutions Fund (www.cdfifund.gov).

Small Business Administration
Finally, also on the federal level, is the U.S. Small Business Administration, which was created to encourage the growth of small business. Thus, SBA loans often have less stringent requirements for owner’s equity and collateral than do commercial loans, making the SBA an excellent financing source for expansion funds.

Obviously, this does not mean the SBA is giving money away. In fact, the SBA does not actually make direct loans. Instead, it provides loan guarantees on behalf of small businesses, promising their lenders that it will pay back a certain percentage of the loans if the businesses are unable to meet their obligations.

Among the most popular SBA programs is its primary loan program, the 7(a) Loan Guarantee Program. 7(a) loans are used for expansion, renovation or construction of new facilities; for land purchases; or for equipment, fixtures and leasehold improvements.

Under this program, the SBA will guarantee up to $1.5 million of a loan that cannot exceed $2 million. Although interest rates are negotiable for loans under seven years, the rate is usually prime plus 2.25 percent. With loans of seven years or longer, the rate is prime plus 2.75 percent. Plus assorted fees, of course.

The SBA’s 504 program is designed to get long-term fixed-rate financing in the hands of small business owners. The loan proceeds can be used for the purchase of major fixed assets such as land, buildings, improvements, long-term equipment, construction or renovation. Borrowing companies are limited to those whose net worth does not exceed $7 million and do not have average net income of more than $2.5 million for the past two years. The cost is based on the current market rate for 5- and 10-year Treasury issues plus an increment above the Treasury rate.

By doing some homework beforehand, service center owners can determine not only how much capital they need to grow their businesses, but the best source for that funding.