Author: Steve Meredith, Manager, Business Finance.
On several occasions throughout the year, I will have a promising opportunity come across my desk, only to fall apart because the timeline for my organization’s economic development loans does not fit with what the client needs. While I can certainly understand the need to be flexible and work with clients, their sellers, and other financial institutions, there are a few aspects of economic development lending that can delay closing on publicly funded loans. This results in a tricky “dance,” in which economic development lenders, their borrowers, sellers, and often private lending institutions must participate to ensure the best interest rates and terms for small business clients.
Economic development lenders generally do not have loan review committee meetings as often as private banks. This means that there will likely be some lag time between when you submit your loan application, and when the loan is presented for review and approval. In the interim, economic development lenders will be reviewing your application, performing underwriting, and asking questions about your business in order to add clarifying information to your loan package for their respective loan review committees.
Even after your loan is reviewed and approved by the appropriate committee(s), your economic development lender may not have in-house counsel on call, meaning that they need to send your loan package out to a third-party law firm to draw up the closing documents. This can take time since the firm drafting the closing documents likely has many other clients to handle.
In addition to drawing up the closing documents, your economic development lender may have additional requirements, such as the assignment of a key person life insurance policy, which will need to be taken care of before closing. Small business owners will want to pay attention to any communication from their economic development lenders following their loan’s approval. Your lender may ask for additional information from you after the loan is approved, but before the closing documents are signed.
As I mentioned at the beginning of this article, the issue of buyers’ and sellers’ timelines not matching that of my organization is a common occurrence and fortunately, there is a work-around for those entrepreneurs who may be experiencing exponential growth in a short period. In your initial conversation with your economic development lender, ask if it is possible to partner with a private lender, and for that private lender to “bridge” the economic development lender’s portion of the project proceeds. Chances are that most economic development lenders already have a leveraged private capital requirement, and they will have likely made loans in the past that have featured this type of financing.
When a private lender bridges an economic development lender’s portion of the project proceeds, the borrower receives 100% of the proceeds when they close on the private lender’s loan. Then, whenever the economic development lender completes their loan approval and closure processes, the borrower takes the proceeds from the economic development loan and pays off the bridged portion of proceeds from the private lender. This results in a more desirable two loan structure, featuring a private lender, and an economic development lender that disburses public funds at a low-interest rate.
Economic development lenders exist to offer low-cost financing to small businesses looking to fund startup or expansion costs. At the end of the day, it is in everyone’s best interest to work together and try to close economic development loans following a timeline that both buyers and sellers deem acceptable. That being said, when you are dealing with economic development lenders who provide publicly funded loans, it is important to understand that additional due diligence is often required by the government before the disbursement of taxpayer-backed funds. This additional due diligence is meant to ensure that public funds are used in a manner that is going to strengthen the economic prosperity of a given county or region, which is in the best interest of the small business owner, and their customers.
The Southwestern Pennsylvania Commission provides government-backed financing for small business start-ups and expansion activities. If your business is located in the Southwestern Pennsylvania region, and you’d like to learn more about how you can apply for financing through the Southwestern Pennsylvania Commission, please feel free to reach out to me via email at firstname.lastname@example.org. I’d be happy to help you out!
Visit the SPC Business Assistance page to learn more!