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 smeredith@spcregion.org. I’d be happy to help you out!
Visit the SPC Business Assistance page to learn more!
