Industrial revenue bond financing
Industrial Development Boards of local municipalities can issue industrial revenue bonds to finance the building and equipping of a new plant or the major expansion of an existing plant. These bonds are typically purchased by institutional investors, arranged through commercial banks or investment banking firms. By state law, the bonds are not government obligations and cannot be guaranteed by state or local government. Bond purchasers look to the company on whose behalf the bonds are issued for repayment; if the company is unrated, the bond purchasers look for a credit enhancement provided by the company, such as an irrevocable, standby bank letter of credit, to guarantee repayment.

Purchasers of tax-exempt bonds do not have to pay federal income taxes on the interest income, resulting in a lower interest rate for the company. However, a number of restrictions are imposed under current provisions of the Internal Revenue Code. For example, at least 95% of the net proceeds must be used to finance a manufacturing facility, there is a $20 million project capital expenditure limitation, no company can have more than $40 million in tax-free bonds outstanding anywhere in the U.S. at the time of closing, and a volume cap restricts the amount of tax-free bonds that can be issued in any state during a calendar year to a percentage of population.

Therefore, it is imperative that companies seek the advice of qualified bond counsel. Due to expenses incurred as a result of these and other federal requirements, it generally takes a bond issue of $2 million and higher before the benefits derived from this financing method will exceed the costs.

USDA Rural Development business financing
The U.S. Department of Agriculture's Business and Industry Guaranteed Loan Program provides guarantees up to 80% percent of loans up to $10 million made by commercial lenders to businesses. The primary purpose is to create and maintain employment and improve the economic climate in rural communities, meaning areas other than cities of more than 50,000 population. Loan proceeds may be used for working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing. The maturity may not exceed 30 years for land, buildings and permanent fixtures; 15 years for machinery and equipment or the useful life of the machinery and equipment, whichever is less; and 7 years for working capital. A minimum of 10% tangible balance sheet equity is required for an existing business, and 20-25% will be required for new businesses and businesses without full personal or corporate guarantees. Information about applying is at http://www.rurdev.usda.gov/rbs/busp/b&i_gar.htm.

Small Business Administration financing
The SBA has two loan programs that are typically used by small businesses in conjunction with their banks: the 7(a) guaranty loan and the 504 loan. For details, click www.sba.gov/financing.

Manufacturers with 500-1,500 employees (based on the type of industry) qualify as a “small business” for the 7(a) loan guarantee program. It can be used for both fixed asset and working capital financing in an amount up to $2 million, with up to $1.5 million guaranteed by the federal government. Interest rates are determined by the bank lender but usually cannot exceed prime plus 2.75%. Generally, maturities are 7-8 years for working capital, 8-10 years for machinery and equipment, and 10-25 years for real estate. Borrowers must provide cash equity in an amount determined by the SBA and the lender. The balance is provided by the lender, up to 80% of which is guaranteed by the government; loans over $250,000 are guaranteed at 75%. Borrowers must provide a personal guarantee.

Eligible businesses for the 504 loan program are for-profit enterprises with a net worth of $7 million or less, and an average net profit after taxes for the preceding two years of less than $2.5 million. It can be used for fixed assets only, such as land, building and equipment. The amount of the 504 loan cannot exceed 40% (up to $4 million for manufacturing) of the total project cost, the borrower provides 10% in cash or equity in project-related land (an additional 5% for start-ups and 5% for single-purpose projects may be required), and a participating bank provides the balance on a first mortgage basis. The interest rate on the 504 portion of the loan is determined by the current rate on 10-year Treasury issues; private lenders charge a going rate, fixed or variable, for their portion. Maturities are generally 10 years for heavy machinery and equipment, and 20 years for land and building. For a small manufacturer, one new job must be created for each $100,000 of 504 loan proceeds. Borrowers must provide a personal guarantee.

Alacom Finance in Birmingham, a for-profit SBA Certified Development Company and Accredited Lender, is one of the Southeast's leading providers of 504 loans and works with businesses and banks to package 7(a) guaranty loans. For more information, click www.alacom.com. A non-profit CDC offering these services is the Southern Development Council, www.sdcinc.org.

Gap financing
The East Alabama Regional Planning and Development Commission administers a revolving loan fund that can provide a portion of a financing package in combination with a conventional bank loan, with or without an SBA loan component. The RLF can provide up to 1/3 of the project cost or $250,000, whichever is less, at a rate which can be below market; banks set the rate for their portion of the loan. Repayment terms are generally 10-20 years for real estate, 5-10 years for equipment and 1-5 years for working capital. Certain equity injection, personal guarantee and job creation requirements must be met. For more information, contact Donna Fathke, 256-237-6741, dfathke@adss.state.al.us.

Conventional financing
Local financial institutions that engage in business lending are:

Non-conventional financing
Stonehenge Capital Company, LLC is a private equity firm managing approximately $500 million. Stonehenge’s Alabama office focuses exclusively on Alabama-based businesses. Activities include select early-stage and later-stage principal investments across a wide range of industries, for expansion and growth capital, management buyouts, acquisitions, recapitalizations, industry consolidations and technology commercialization.

Stonehenge looks for companies with a leadership position in their industries, with seasoned management having relevant industry experience, in a favorable industry climate for growth, having proprietary technology or other key competitive advantage, which are headquartered in Alabama with 100 or fewer employees at the time of investment, and have a capital requirement from $500,000 to $3,000,000 (larger transactions can be completed with co-investors).

Debt financing can be senior debt with flexible structures, and mezzanine financing for companies with a history of positive cash flow. This structure bridges the gap between debt and equity to help close complex transactions or provide financing beyond traditional bank loans. They may be secured or unsecured and typically include equity participation. Equity financing can be convertible or redeemable preferred stock invested in businesses with tremendous growth potential, or made in conjunction with a leveraged situation or buyout. For more information, contact:

Stonehenge Capital Company, LLC
Steven W. Davis, Director
One Chase Corporate Center, Suite 400
Birmingham, Alabama 35244
Phone: 205-313-6327
Fax: 205-313-6328
swdavis@stonehengecapital.com