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Banks Not the Only Source of Funds For Emerging, Growing Companies
Capital Ideas: It is often difficult for new companies to obtain financing to get their businesses up and running; however, there are other alternative sources of capital for small businesses.
By Matthew Harrison
Date Posted: 6/1/2007
It is often difficult for new companies to acquire the funds necessary to get their businesses up and running. Even existing companies have trouble securing capital for expansion or a business plan that might put their products on the map.
Simply put, big lenders don’t give little spenders the time of day. The ones that make loans to small businesses usually charge exorbitant interest rates or impose impractical down payments. High-interest loans and steep payment plans add to the frustrations of small business owners who are trying to compete in the dog-eat-dog pallet industry.
However, with a little cleverness and a lot of patience, small businesses can fund their entrepreneurial ventures through less conventional means.
SBA Guarantees Loans
The federal Small Business Association (SBA) offers loan programs that cover a wide variety of circumstances for entrepreneurs. The SBA does not actually loan money, but it guarantees loans to small businesses, which make them less risky for creditors and more manageable for small companies.
Generally, the SBA guarantees loans for $1 million although it will guarantee loans as high as $2 million. Typically, the agency guarantees loans from banks but also will guarantee loans from other lenders.
Banks or other financial institutions that are hesitant to make a loan to a small business will suggest the company apply for an SBA-guaranteed loan. The lender still has the final say whether or not it will issue the loan; the SBA’s only role is to guarantee the funds credited.
SBA-backed loans can be used for anything from equipment, expansion, land acquisition, and even refinancing. According to the SBA Web site, loan maturity is up to 10 years for working capital and 25 years for fixed assets. Another advantage of SBA loans is that the interest rates are subject to SBA maximum Prime Rates, which safeguard small businesses from exorbitant and unmanageable interest payments.
The SBA also offers other types of creditor services for various companies. Certified Development Company (CDC/504) loans provide long-term financing for companies striving to make a deep economic impact in their community. The CDC is a nonprofit corporation that helps small businesses to finance renewal and renovation projects with the help of the SBA and accredited lenders.
Furthermore, the SBA allows increased debt of up to $2 million for companies trying to meet public policy goals and $4 million for companies defined as small manufacturers. Examples of public policy goals include business district revitalization, rural development, changes necessitated by federal budget reductions, and expansion of minority business development.
The SBA also offers a ‘micro-loan’ program. These loans are available through non-profit, community-based lenders and do not exceed $35,000. All credit decisions are made on the local level, and the average loan amount is usually about $13,000 for newly established or growing small businesses.
The SBA also offers disaster assistance loans to homeowners, renters and businesses. These long-term, low-interest loans help companies stay in business while they rebuild from a disaster. Business must be located within a federally recognized disaster area in order to be eligible for these kind of loans.
$400 Billion in Grants
The federal government awards billions of dollars in grants annually to companies that take on projects that generate public benefits. About $400 billion worth of grants are awarded annually through about 1,000 various programs.
Grants.gov, an interactive Web site, was established by the Bush administration to publicize the availability of federal grants and simplify the application process. Once a company completes the registration process at the Web
The Department of Agriculture offers a number of different grant programs, some directly linked to the forest products industry. For example, rural development programs offer incentives for companies attempting to strengthen rural communities. Rural Business Opportunities grants provide up to $50,000 per applicant for the 2007 fiscal year, and up to $150,000 is available for companies engaged in multi-state projects. Other grants may be made available throughout the year based on the final appropriations bill.
The U.S. Forest Service awards annual grants to help promote the use of wood. Through the Wood Education and Resource Center, the Forest Service allocates money to local, state, and tribal governments as well as non-profit organizations to educate the public about the benefits of wood and promote the use of wood.
“We used it to implement a lot of different projects to look at ways that wood from emerald ash borer-related removals could be turned into value-added products,” said natural resource specialist Jessica Simons of the Southeast Michigan Resource Conservation and Development Council (SMRCDC).
The major downfall of annual government grants is that they require budget approval from legislators, which means there is no guarantee that funds will be available from year to year.
Companies that are considering seeking grant funds should survey grant listings as soon as possible. Even though the SMRCDC was able to disperse funds to two companies last year, Simons added that her organization did not request funds for local businesses or organizations this year. Instead, the non-profit group intends to develop a small business cooperative in response to the area’s emerald ash borer infestation.
Dan LaMont, founding partner of LaMont Brothers Tree Service and a recipient of SMRCDC grant funds, is thankful for the help. “Without the grant funding, it would have been really difficult to get a project like this up and going,” he said.
LaMont Brothers learned about the SMRCDC through a state contract they had to remove trees damaged by the emerald ash borer from heavily populated areas around Detroit. After learning about the grants, the company applied for and eventually received two separate grants totaling $69,000.
LaMont Brothers used the first grant of $50,000 to invest in a Wood-Mizer portable band sawmill. “We had owned a smaller version before that,” Dan said, “but with the onset of emerald ash borer, the volume of material was just so great that we thought we were going to have to upgrade.”
Two years later, LaMont Brothers applied for a second grant through the SMRCDC for another $19,000. The company used the funds to purchase two Nyle dehumidification dry kilns.
The lumber the company produces is sold mainly for flooring and pallets, but LaMont Brothers hopes to expand further into the flooring market and also to furniture markets.
Understanding the mission of the agency that has grant funds to award and outlining your company’s complementary business plan are essential to obtaining a grant. LaMont Brothers marketed itself to the SMRCDC. Dan said the reason his company received the grants was because LaMont Brothers and the SMRCDC had the “same vision” for using wood damaged by the emerald ash borer.
“There’s a long process to get approved, but once you’re approved, it’s easier to justify taking the big risk,” Dan remarked. “The grants are matching funds, so whatever I get I’ve got to match. It basically cuts your risk in half.”
Another consideration for companies considering seeking grants is that the entire process, both before and after a company is awarded a grant, is very time consuming. Interested businesses should make sure they have the necessary resources to devote to providing the documentation the government requires. “There’s a lot of paperwork that goes along with it,” Dan acknowledged. “You have to log production and everything else and make sure you justify them giving you the money,” he added with a light-hearted laugh.
State Grant Sources
Most states have something similar to the federal government’s Small Business Administration, typically a department of economic development or business assistance.
Representatives of these state agencies may be more helpful than federal officials in directing you toward available grants in various state agencies. They also can help compare grants to bank loans and other funding sources to help decision makers determine the most appropriate financing. It is important to note, however, that other state agencies may actually provide the grants.
Krajicek Pallet Inc. of Denison, Iowa benefited from a state grant. The company applied for a grant in 2006 from Iowa’s Department of Natural Resources Solid Waste Alternatives Program (SWAP). The program is aimed at reducing landfill usage by recycling and reusing materials instead of buying them in a landfill.
“It’s completely a state program,” said DNR representative Tom Anderson. “It’s funded along with eight other statewide programs out of a surcharge on every ton that is landfilled in the state.”
Krajicek Pallet received a matching grant worth $158,257 for a total project cost of $316,514. The funds are being used to purchase new equipment so the business can increase recycling of wood waste material. The efforts of Krajicek Pallet will prevent 9,173 tons of material from entering area landfills annually.
Tom added that DNR provides information about grants and disburses funds, but the agency does not walk applicants through the entire process. “We can answer questions if they come to a fork in the road,” he said.
Tom suggested that businesses that need help completing the application process should visit Iowa Department of Economic Development or small business administration offices.
The opportunities to obtain grant funds are out there to be discovered, and devoting some resources to identify them and apply for them may go a long way toward putting your company on a firm financial foundation.