PCDI Financing Options for Business Development

as presented by

PIONEER COUNTRY DEVELOPMENT, INC.
P.O. Box 248
Hill City, Kansas 67642
785-421-3488
nwkpdc@ruraltel.net

The financing of a business venture can come from a variety of sources; however, it takes careful planning and research to discover the available financing that would be best for your business development. It is extremely difficult to start a business where 100% of the need is financed. When a potential business owner does not have the 10% to 20% cash available to inject into a project, then a review of personal assets should be completed to determine what assets can be used to finance the needed injection for a project. A lender's participation in a project is determined by the following factors:

The project
The management and experience
The financial commitment and resources of the owner(s)
The type of industry/business
The use of funds
The security and collateral arrangement
Past credit history of the business
Investment policies of the lending sources

The following attempts to identify and summarize some of the possible public sector sources of financing available to assist businesses starting up, relocating to Northwest Kansas, or expanding their present business. The information is divided into Federal Programs, State Programs, and Local Programs.

FEDERAL PROGRAMS

Community Express SBA Guaranteed Loan: Community Express loans offer qualified small business owners unsecured loans ranging from $5,000 to $25,000 with a 7 year term, an interest rate of Prime + 4.50%, no-prepayment penalty, minimal paperwork and a quick approval time. Business Loan Express is a non-traditional bank, which has a contracted arrangement with SBA to make these loans whereby Community Express receives an 85% guaranty from SBA. Community Express utilizes a credit scoring system based on credit score and payment ability to determine creditworthiness of the applicant. As part of the loan, borrowers are encouraged to receive technical assistance to better operate and grow their business. Potential uses for the loan include a start-up that does not have sufficient collateral or down payment, an existing business, which needs some additional working capital, or gap financing to offset some of the bank's risk in doing a larger project.

SBA Loan Express Program: SBA Loan Express is an SBA Guaranteed Loan through your local bank that has completed the paperwork to be a designated SBA Loan Express Lender, whereby the Lender will receive a 50% loan Guaranty from SBA. The bank makes the credit decision and loan is completed on the bank's loan paperwork. The loan is a maximum of $350,000, can be an amortized loan or a line of credit loan for maximum of seven years, plus the terms and interest rates are determined by the bank. The loan application has minimum paperwork to complete to be submitted to your banks for approval.

SBA 7(a) Loan Guaranty and Low Doc Programs: The SBA guaranty loans are made by a private lender, usually banks, and guaranteed by SBA. The maximum guaranty is $1,000,000 and the interest rates can be fixed or variable, typically not to exceed 2.75 percent over the prime rate of Wall Street Journal. SBA will guaranty 85% of loan up to $150,000 and 75% of loans greater than $150,000. Loan proceeds can be used for land, buildings, construction and renovations, machinery and equipment, working capital and inventory. In certain situations debt refinance can be included in the SBA guaranteed loan. If the loan request is less than $150,000 a Low Doc application may be used, a simple two page application. Generally, SBA makes a decision on the Low Doc application within three days of submittal to the Sacramento, CA office. On guaranteed loans up to $150,000, SBA allows the bank to retain 25% of the guaranty fee.

Certified Development Company (504) Loan Program:
The SBA 504 loan program is a partnership between the SBA, a Certified Development Company (CDC), and a private lender in 10 to 20 year term financial packages. The loan proceeds are to be used to assist small businesses with plant acquisition, construction, conversion or expansion, including the acquisition of machinery and equipment with a useful life of at least 10 years. The 504 program cannot be used to provide working capital or to refinance existing debt. However, a SBA 7(a) guaranty can be submitted in conjunction with the 504 application for working capital, inventory, etc.

This is a great program to use, which enables a financial institution to reduce its risk in a project and provide a low interest rate for the borrower that is fixed for 10 to 20 years. The typical structure for the 504 programs is for the financial institution to provide 50% with a first mortgage/lien on the projects assets, SBA will finance 40% for an existing business, 35% for a start-up or 30% for a special use facility, with a second mortgage/lien on the projects assets and the borrower will provide either 10% for an existing business, 15% for a start-up or 20% for a special use facility. The maximum 504 debenture limit (SBA portion) is $2 million, the minimum size is $25,000 and should create one (1) job for every $50,000 of debenture. However, if the business is manufacturing, the debenture limit is $4 million and needs to create 1 job for every $100,000 of debenture. In general, businesses are eligible for the 504 program if they meet the following requirements; the business, owners, directors or members and their affiliated business (if they own or control 50% or more of the affiliated business) has a tangible new worth of less than $7 million and a 2-year average net profit after Federal Income Taxes of less than $2.5 million. Again, this is a great program to use which enables a financial institution to reduce risk in a project and allows the borrower to receive a fixed interest rate on up to 40% of the project.

SBA Disaster Loan:
Disaster assistance can be made when the President or the Administrator of the SBA declares a specific area to be a disaster area. There are two types of disaster loans (1) Physical Disaster Loans and (2) Economic Injury Disaster Loans. Physical Disaster Loans are made to homeowners, renters, businesses (large or small) and nonprofit organizations for the purpose of repairing or replacing damaged or destroyed homes, personal property, and business property. Economic Injury Disaster Loans are made to small businesses which suffer substantial economic injury because of the disaster. Loan proceeds may be used for working capital and to pay financial obligations which the small business could have met if the disaster did not occur. These loans are generally at an interest rate of 4%.

U.S. Department of Agriculture Business and Industry Loan Program:
The U.S. Department of Agriculture, through its Business and Industry Loan Program (B&I), guarantees loans from local lenders to businesses and industries to benefit rural areas. A primary purpose of the program is to create and maintain employment as well as improve the economic and environmental climate in rural communities.

Assistance is provided in the form of a loan guarantee of up to 90% of the principal and interest. Applicants apply for loans through private lenders who are responsible for making and servicing the loans. The loans are limited to a maximum of $10 million. The proceeds of loans under this program can be used for financing construction, conversion, acquisition, machinery and equipment, inventory, and working capital. The applicant will be required to provide sufficient cash or other assets as reasonable assurance of a successful project. The Business and Industry program works much the same as the SBA 7(a) guaranteed loan program.

Rural Business Enterprise Grant:
The grant is to support the development of small and emerging private business enterprises located in a rural area. The grant is made to local governments (city or county) or private non-profit corporations in rural areas with a population of less than 50,000, which in turns lends the proceeds to the business. These funds can be used by the local government or non-profit corporation to set up a revolving loan fund. Generally, these grants are in the maximum amount of $50,000. The funds may be used for land acquisition, easements, right-of-ways, construction, conversion, enlargement, repairs, building modernization, plant, machinery, equipment, access streets, abatement facilities, start-up operating costs and working capital. The funds cannot used to produce agricultural products, finance comprehensive area wide type planning, or programs operated by cable television systems.

Rural Economic Development Loans and Grants (REDLG): This program finances economic development and job creation projects in rural areas based on sound economic plans. REDLG's are available to any Rural Utilities Service electric or telecommunications borrower to assist in developing rural areas, to create jobs opportunities, and to retain existing employment. Loans at zero percent interest are made primarily to finance business start-up ventures and business expansion projects and generally require a Letter of Credit from a financial institution as security for the loan. Projects should substantially benefit areas having a population of less than 2,500 residents.

U.S. Department of Commerce Economic Development Administration:
EDA Grant:
This is a true grant to a city or county for the purpose of providing infrastructure for a project. Examples are construction of roads, water lines and sewer for a business development project. It can provide up to 50% or 60% of the project costs for eligible counties. It is based on creation or retention of jobs. The maximum available is $1 million or the dollar amount that is available at the time of grant application. Eligibility is based on per capita personal income and/or unemployment rates.

STATE PROGRAMS:

Community Development Block Grants (CDBG): The Economic Development Grant (CDBG) is used to assist communities in the attraction and expansion of industry. The financing available through this program is awarded five (5) times a year on a competitive basis. The funds allow cities or counties to assist in the financing of business projects that create jobs for low-to-moderate income persons. The CDBG funds are available to cities with a population of less than 50,000 or counties of less than 200,000 in population.

The grant funds are awarded to a city or county (local unit of government), in turn, the city or county loans the funds to the business entity at a low interest rate of 3.5% below prime rate quoted in the Wall Street Journal (minimum interest rate is 4% for manufacturing type businesses and 2% above prime rate for non-manufacturing businesses). This is a fixed rate loan equal to $35,000 per job created or retained and the loan structure is determined by the needs, loan purpose and available cash flow of the business applying for the funds. Coordination with other financing programs is available.

The regulations require one (1) job be created for every $35,000, and the maximum grant funds available through the CDBG program is $750,000. The program has a leverage requirement of 1:2 ratio of non-CDBG funds to CDBG funds for grant projects of $500,000 or less and 1:1 ratio for projects over $500,000. The eligible uses are as follows: land and buildings, construction or renovation, infrastructure improvements, machinery and equipment and working capital.

Export Loan Guarantee Program: Kansas is one of the few states which has its own export loan guaranty program. The export guaranty can help a small company obtain financing to pay the costs associated with an export sale. This guaranty can assist a manufacturing company to obtain a loan to pay for raw materials and components necessary to manufacture products for an export order to assist an export trading company obtain a loan to pay for product purchases under an export transaction.

Basic features of the program includes:

90% guarantee to a Kansas Financial Institution
$300,000 maximum guarantee amount (supports a maximum loan of $330,000)
Maximum term of one year
Advance against letter of credit/foreign purchase orders
Supports single/multiple export transactions

Kansas Partnership Fund:
The Kansas Partnership Fund is a program to provide low-interest loans to cities and counties for infrastructure improvements that support basic enterprises. The loans are designed to assist city and county governments in their efforts to attract new businesses and expand existing businesses. All cities and counties in Kansas, regardless of size, are eligible to apply.

Eligible projects include the construction, reconstruction, rehabilitation, alternation, expansion or improvements of public facilities. Projects included are roads, streets, highways, storm drains, water supply treatment facilities, distribution lines, wastewater collection lines and any related improvements. These improvements must directly lead to job creation for Kansas enterprises.

Business that are eligible include those that are located or proposed to be located in Kansas and involved in manufacturing, mining, agriculture, and interstate transaction. Other businesses eligible are wholesale trade, financial services, business service, tourism activities, plus research and development of new products, processes, or technologies.

Kansas Enterprise Zone Act:
The Kansas Enterprise Zone Act established a non-metropolitan regional business program which will provide business expansion and development incentives on a state-wide basis. These businesses may be eligible for 1) a one time job creation tax credit of $1,500 per new job 2) an investment tax credit of $1,000 per $100,000 qualified business facility investment and 3) sales tax exemption on the purchase of personal property or services purchased for the purpose of constructing, reconstructing, enlarging, remodeling, or equipping a qualified business facility. Businesses in a designated non-metropolitan region may receive an enhanced credit of $2,500.

To be eligible for these incentives, manufacturing and retail businesses (eligible for sales tax exemption only) must create two net new jobs. Non-manufacturing, non-retail businesses must create five jobs to qualify. Retail businesses are only eligible for the sales tax exemption if located in a community of 2,500 population of less.

WORKFORCE TRAINING PROGRAMS:

Kansas Industrial Training (KIT):
The Kansas Industrial Training program is a comprehensive and flexible workforce training program designed to respond to the specific needs of new or expanding companies. Eligible industries include enterprises that are creating at least one (1) job (excluding recalled workers, replacement workers or jobs that formerly existed). Industries available include manufacturing, distribution, regional or national service facilities and other businesses primarily engaged in the development or production of goods or the provision of service of out-of-state sale.

The KIT program may be used to cover expenses related to pre-employment, classroom and on the job training. Examples of typical training costs include: instructor�s salaries, travel, meals and lodging, video tapes, training manuals, and textbooks, supplies and materials, minor equipment, temporary training facilities, and curriculum planning and development.

Training programs designed to respond to specific company needs may be offered in area vocational-technical schools, community colleges, temporary rental facilities, or the company's plant. Instructors may come from either the company's production or supervisory staff, community colleges, area vocational-technical schools, consultants or vendors.

The maximum grant available is $2,000 per trainee, however, a typical grant averages much less. The awards range from $5,000 to $150,000 per project. Pioneer Country Development, Inc. can write this grant for the business.

Kansas Industrial Retraining (KIR):
The KIR program assist employees of restructuring industries who are likely to be displaced because of obsolete or inadequate job skills or knowledge. KIR funds can be used to pay of some retraining costs that are eligible under the KIR program. The KIR program requires matching dollar of dollar funds from the company. Eligible industries include enterprises that are restructuring their operations through incorporation of existing technology, development and incorporation of new technology, diversification of production or the development and implementation of new production activities. At a minimum, at least one (1) employee must be trained under the project to qualify for assistance. Projects are funded on a competitive basis and are awarded every two months. $2,000 is the maximum per trainee. However, the average award is much less. Awards range from $1,500 to $100,000 per project. Pioneer Country Development, Inc. can write this grant for the business.

State of Kansas Investment in Major Projects and Comprehensive Training (IMPACT):
The IMPACT program may be utilized by individual businesses or consortiums of companies adding new jobs. Like the KIT program, IMPACT is intended to help companies offset the cost of training employees for new jobs, however, the funding capacity is substantially larger because the number and average wages of the new employees determine the project funding limits.

Eligible industries include enterprises that are creating jobs (excluding the jobs of recalled workers, replacement workers or jobs that formerly existed). Eligible expenditures are similar to those of the KIT program. In addition 50% of a project's funds may be used to lease or purchase training equipment for local educational institutions. Up to 10% of the training funds may be used to cover the administration costs of the school.

Training project costs are financed through tax exempt, public bonds issued on an as needed basis by the Kansas Department Authority. These bonds are retired by utilizing up to 1% of the revenue received from statewide employer withholding taxes. Individual bond size may not exceed 90% of the withholding taxes received from the new jobs created by a project over a ten year period.

After the project funding limit is determined, the company and a Kansas public educational institution develop a joint training proposal for submission to Kansas Department of Commerce.

Kansas Development Finance Authority (KDFA):
Kansas Beginning Farmer Loan Program:
The KDFA administers a federal program for beginning farmers. This program allows Kansans who have agricultural experience, but have never owned significant amounts of farmland, to secure below-market interest rate financing on purchases of agricultural land, improvements, equipment and breed stock. Interest rates generally run from 1 to 3% below the market interest rates. The program is funded through the issuance of tax-exempt bonds in the amount of the beginning farmer's loan. In most situations, the bond purchaser is the applicant's personal banker, who in turn, loans the proceeds to the applicant at a reduced rate. The loan limit is $250,000.

Kansas Technology Enterprise Corporation:
Ad Astra Seed Capital Fund:
Through KTEC Holdings, Inc., the Ad Astra Seed Capital Fund, KTEC provides financing for Kansas advanced technology companies at their earliest stage of development. Funds are used for, but not limited to, prototype testing and refinement, field testing and initial marketing assessment and development. To be considered for a seed capital investment, a firm must demonstrate that the innovation will provide a competitive edge in the marketplace; significant employment will be generated in Kansas; and sufficient capital is unavailable through traditional financing sources. The goal of seed capital investment is to ready the company for venture capital.

LOCAL PROGRAMS:

Industrial Revenue/Development Bonds (IRBs):
IRBs are security obligations issued by municipalities and counties on behalf of a particular business entity. IRBs allow governmental units to serve as a financing conduit for business. The IRBs are not backed by the full faith and credit of the issuing governmental unit, thus the ability of a company to use this type of financing is incumbent on its own financial strength and ability to repay the obligations.

Property financed with the proceeds from IRBs can qualify for property tax exemption for a period of up to ten years and possible sales tax exemptions which apply to the cost of building materials and equipment installed at the site.

A benefit to financing with IRBs is the potential for long term financing at a reduced interest costs when compared with traditional financing. The lower interest rates are achieved because interest on IRBs issued under Kansas law is not considered as gross income for Kansas Taxpayers. Also, certain qualifying projects may benefit from like treatment at the federal level, making interest received by bondholder, exempt from federal income taxes.

To qualify as federally tax exempt, the bond issue must meet the guidelines and requirements of the Internal Revenue Code, Kansas Statue, and be supported by the local government. The proceeds of such a federally, tax exempt issue are restricted to financing the cost of land, building and equipment, other development and financing costs.

Due to the fees involved, projects under $500,000 are generally not feasible, unless you have a bank that will purchase the bonds. The interest rate depends on whether the IRBs are non-taxable or taxable.

Pioneer Country Development, Inc. Staff:

Randall J. Hrabe is the Executive Director of Pioneer Country Development, Inc. Mr. Hrabe has been with the organization for 17 years and has additional years of banking experience, along with private business experience. He is a qualified Economic Development Professional.

Steve Hanson has been with the organization for over six years, plus an additional 14 years experience in banking and three years with FDIC. He can provide a full line of commercial business loan analysis and loan packaging services. He is a qualified Economic Development Professional.

Michele Kippes is the manager of the Hays office and has been with the organization for five years. She can provide loan analysis, loan packaging services, financing, grant writing, and grant administration. She is a qualified Economic Development Professional.

Darren Murphy joined the Pioneer Country Development, Inc. in December, 2004. He is working with loan analysis, finance as well as grant writing and administration.

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