Is Your Business Struggling To Find Capital?
Think about your local Community Development Corporationby Joseph Lizio - January 25, 2010
Whether you are a small mom and pop shop or a multi-national corporation, all businesses impact or are impacted by the communities in which they operate.
Most businesses, when they first commence operations, think long and hard about their location to include factors like the availability of needed materials and resources, the local labor pool and its talent base and in particular the ease of access to capital sources. But, over time, the characteristics that drew a business to a certain locale may have changed; sometimes for the worse.
Throw in this bad economy and businesses residing in declining or distressed areas receive the proverbial double whammy.
However, many communities, looking to retain some sense of viability as well as to support the businesses that continue to support them and their population have developed unique financing vehicles termed Community Development Corporations (CDC).
For the most part CDCs are non-profit organizations publicly funded via their city's government or through state or federal grants. However, there are some that are for-profit organizations and tend to receive their funding from local banks in conjunction with community reinvestment act initiatives.
Regardless of how they are funded, these financing organizations can help local businesses by either providing grants or loans to community based businesses that are either struggling to stay afloat or looking to expand.
Most CDCs typically have two or more programs focused on hard assets acquisition. Hard assets meaning the purchase, construction or rehabilitation of physical plant and property (building or land) or for capital equipment purchases and needs.
Further, some of these programs are great for companies that are struggling to meet traditional bank loan-to-value (LTV) requirements. Example, your bank approves your $1MM loan but will only fund 65% of the amount - requiring your business to secure the remaining 35% or $350K in equity.
In steps the CDC. Most CDCs programs can raise the LTV amount to 90%. Thus, in this scenario, the company would only have to raise $100K in equity, receive $250K from the CDC and the remaining amount from the bank. Originating banks tend not to mind these agreements as the CDCs will usually take a second lien position behind the originating financial institution.
Moreover, for some companies that do not meet traditional financing requirements, many CDCs have subprime products. While these are not modeled after the subprime products that destroyed our financial markets in 2008 and 2009, they do require less underwriting, overall, than many traditional lending organizations.
Other benefits include low rates (even compared to traditional lenders) - most of which are fixed for the term of the loan, loan terms of up to 30% longer than most bank lending facilities (reducing monthly cash flow needs) and moderate to low fees and reporting requirements as the goal is to help community based businesses provide benefits back to the community in terms of job growth and local wealth creation.
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There are some caveats. Most of these CDCs, especially those capitalized via public funds, may require the following (just to outline a few of the most important):
Must qualify as a low-income business; meaning that at least 50% of the employees and 50% of the business's asset must be located in a qualifying low-income census tract. The sunnier side here is that given our current economic environment - more and more areas are now deemed low income. For example, nearly the entire city of Fort Worth, Texas is deemed a qualifying low-income area.
Operating companies must occupy at least 51% of the property being financed - termed owner occupied. Thus, these funds cannot be used for investors or real estate speculators.
No partial repayments - thus potential prepayment penalties (usually during the first half of the loan's term). These CDC organizations rely, in large part, on the income they can generate from interest. Without such income, they would not be able to continue lending to other businesses in the area.
Generate a large portion of their revenue from outside the immediate area. The idea here is to bring revenue from outside the local money supply - thus increasing the wealth potential and economic impact to the immediate community.
And, in some circumstances, the business must create additional jobs in the community - particularly jobs for low- to moderate- income residents. Further, these jobs must pay, at the least, the average wage rate within the area.
Many of these caveats, especially those that require the business to be located in low income areas and create local jobs, are a strict requirement should the business solicit the CDC for grant funding.
The bottom line, if your business is struggling but has a very clear path to turning itself around, especially as we begin to see actual recovery taking place; but only lack the financing piece of the equation, Community Development Corporations may be your salvation. These groups are based on a very simple premise. They wash your back (provide your business with needed capital) and you wash their back by improving your local communities and the people that reside within.
To find a Community Development Corporation in your area, you might start by contacting a local SCORE or Small Business Development Center office in your city, visiting your local Chamber of Commerce or contacting your city's officials.
Either way, if you are in the market for financing hard assets like Property, Plant and Equipment you might want to start searching out your local Community Development Corporations. What is the worse that can happen, you receive the funding your business needs at rates and terms better than you ever though imaginable in these financially trying times.
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Is Your Business Struggling To Find Capital? Think about your local Community Development Corporation - Business Money Today