Myra L. Moss
Financing programs available through the public sector can be a useful tool for manufacturers in their efforts to establish or expand operations in the State of Ohio. Various sources of assistance exist at the local, state, and federal level.
Public sector loan programs often have the following characteristics: loans are most often made for fixed assets, interest rates are often lower than bank rates, terms can often be longer than conventional financing, debt can be subordinated, and repayment may be deferred. Public sector loans are used most often to provide "gap" financing. "Gap" financing fills the void between the cost of the project and the total amount of funds that the business has available from other sources, such as owner's cash and bank loans. In addition, public sector loans are often used to lower the initial financing cost of a business expansion or location to assure a favorable rate of return on investment.
Most public sector loan programs have specific goals that must be addressed if a company is to obtain financing. These most often include the creation and/or retention of jobs, the expansion or retention of existing operations, the attraction of new businesses, increasing the local tax base, and leveraging private sector dollars. Additional issues that should also be considered include the requirement to pay prevailing wage for construction, some public disclosure of business information, environmental review procedures, and non-relocation policies.
As with bank financing, the strength of the individual company and project will be evaluated in the loan decision process. Measures include guarantees and quality of security and collateral, management capability, ability to repay the loan, adequacy of working capital, and degree of equity participation. Applicants will be required to submit personal and business financial statements, and start ups should be expected to provide an acceptable business plan.
The types of projects that public sources finance can vary by agency, but most often include industrial/manufacturing, warehouse/distribution and research and development. Occasionally larger scale retail or commercial can also be financed through public sector programs. The application procedure typically involves a pre-application and full application and takes at least 90 to 120 days to reach approval.
This chart, in Adobe Acrobat format, provides a brief overview of most public financing tools available for larger companies and manufacturers in the State of Ohio. A glossary of terms that a business should understand before applying for public financing also appears in this fact sheet below.
Amortize: Write off or depreciate the initial cost of an asset over a period of time.
Collateral: Property offered by the borrower as security on a loan.
Debenture: An acknowledgment of a debt (loan) on which fixed interest is being paid.
Depreciation: The decline in value of a fixed asset due to wear, destruction or obsolescence.
Equity: Contributions, usually in the form of cash, by the owner or others to a business.
FTE (full time equivalent): Full time employee based on 2,080 hours per year.
Fixed Assets: Durable resources of value owned by a business such as land, buildings, machinery and equipment.
Gap Financing: Loans designed to address various credit, collateral or incentive gaps in a particular project.
Guaranty Program: A loan from a private lending institution that is partially paid by a government program in case of default by the borrower.
Interest: Price paid for the use of borrowed funds over the term of the loan. Can be fixed, remaining constant over time, or variable, fluctuating with prime rate or other economic indicators.
Interim or Bridge Financing: Temporary financing used to move a project forward until permanent financing is available.
Key Person Life Insurance: Often required on president or owner of business; repays loan to lender in event of owner's death.
Letter of Credit (LOC): 1) Bank guarantee of payment for goods not yet received. Often used in international trade; 2) Bank guarantee of a bond issued in the capital markets.
Leveraging: Using private dollar commitments to obtain public dollars in order to obtain sufficient financing for a project.
Line of Credit: Pre-approved credit of a specified amount that allows the borrower to draw funds on demand.
Maturity: The date a loan is due to be paid in full.
Non-Relocation Clause: Prohibitions by certain public financing programs against providing assistance to intra- or inter-state relocation of companies.
Personal Guaranty: Commitment by business owner to repay the business's debt in the event of default.
Prevailing Wage Rates: Categorical wage rates established by state or federal government that must be paid to construction workers on projects financed through certain state and federal programs.
Prime Rate: Interest rate charged by banks on loans to their most creditworthy customers.
Principal: The amount of a loan excluding interest charges or payments.
Subordinated Debt: A loan that takes an inferior position to other financing; second position mortgage, for example. In the case of default, the loan in first or superior position is paid off before other loans.
Take Out Financing: Permanent financing that becomes available once certain project milestones have been completed, i.e. portion or all of building has been constructed, equipment has been purchased, etc.
Term: The length of time between loan date and maturity.
Working Capital: Monies required to operate including rent, wages, salaries, inventory.
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Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868