EDA | Business Resources and Incentives | Industrial Development Bond Financing VS SBA 504

Business Resources & Incentives > Industrial Development Bond Financing Program > IDB vs. SBA 504 Financing

Industrial Development Bond vs. Small Business Administration 504 Financing

Summary:

SBA 504 is better for younger companies, that are not as strong financially, who have less equity (10% for SBA vs. 20-25% for IDBs) and have smaller projects (under $3 million). The application process maybe slightly faster and qualification generally easier for SBA, though IDB projects can receive financing in three months.

IDB’s much lower interest rate (IDB's APR has been 4.6 pts lower than the 504 rate), longer repayment period 30 vs 20, no pre-payment penalties, no ownership structure conditions and much less stringent collateral requirements enable financially stronger, manufacturing companies to grow much faster and often purchase larger facilities (that they will not outgrow as quickly). Equipment can be included in an IDB or a fixed rate, useful life bond can be issued.

If it is at all possible for a business to qualify and come up with the additional 15% equity for an IDB, the IDB will be by far the best financing option, especially over the long term.

	IDB	SBA 504
Interest Rates: IDB APR averages 3.79% vs. 6.9% SBA504 and 8.2% for the bank Click here for a comparison chart	Weekly Variable Rate Since 1994, tax-exempt IDBs have averaged less than 2.3% - plus annual bank LOC fee of 1.5 % for a conservative APR of 3.8%%	Fixed Rate 20 Year ave. SBA 504 6.88% (40% of the project) and Bank of prime plus 2 = 8.2% for 50% of the project
Term: IDB is 10 years longer	30-35 year max for land & buildings	20 year maximum
Closing Costs: SBA’s may be 1% lower, but the IDB’s lower interest rates can recover the additional costs in 6 months or less	Range from 2.5% to 3.5%, depending upon the size of the project (lower percentage cost for larger bonds), 2% can be included in bond	2.65% - all of which can be included in the loan
Ownership structure: SBA has restrictions, IDB none	No limits – LLC is usual	Restrictions - borrowers must reflect vs company ownership
Pre-payment: None for IDBs – quite possibly quite significant for SBA	No penalties or limitations	Pre-payment penalty can be significant if interest rates have increase since the loan was issued and can make it too costly to pay off early
Security: SBA’s is usually much more restrictive and limiting	Collateral requirements determined by bank - typical bank criteria	SBA will take a lien on everything - the Bank and SBA combine to make it difficult to obtain any additional financing while the loan is outstanding
Assumable: Ok for IDBs, not for SBA	Yes if User is a manufacturer and obtain it own bank LOC	No
Equity requirement: SBA’s is 15% less	Typically 20-25% - negotiated with bank - other collateral can sometimes be substituted	Minimum of 10%
Project Size: SBA is minimum is lower but their max is also much lower	Cost effective minimum is about $3 million, $20 million maximum ($10 million tax-exempt, the balance taxable) (Equipment IDB minimum $1 million)	Minimum is $500,000; Maximum is $20 million, $4 million from SBA if manufacturer
Company Size: Larger companies can utilize the IDB program	No limitations, though publicly sold companies may have a harder time qualifying	net worth under $7 million, and net revenue for the past two years of less than $2.5 million

How does an Industrial Development Bond (IDB) work?

These bonds are only available for manufacturing businesses to purchase lands, buildings (or construct new ones) and new equipment.

State and Federal Tax Exempt bonds are sold on behalf of a business to bond purchasers (typically money market funds) by an Industrial Development Authority (in our case, the County of Alameda) who sells shares of these double tax exempt, very safe and liquid bonds, to money market and investment funds.

Security is provided to the bond purchasers by a bank with a credit rating of “A” or better (rated by Moody's or Standard and Poor’s). This Letter of Credit (LOC) bank guarantees repayment of the bonds and the bank actually makes the principal and interest payments to the bond purchasers. As a result, business disclosure is limited to a short description, and the bonds are very safe, short-term investments. The bank protects itself with a loan agreement with the business/borrower for collateral and repayment, for an annual fee of about 1.5 %.

When the bonds are sold, the funds are placed in a Trustee Bank, who will disburse the funds to the business/borrower upon receipt of a requisition signed by the LOC bank. The Trustee Bank invests the funds to equal the cost of interest plus the bank’s Letter of Credit fee, so there is no “cost of carry” until purchases/expenditures are made and businesses have over 3 years to draw down the proceeds.

Because the bonds are State and Federal Tax exempt, the federal government limits how much can be can be approved in each state, each year (about $1.9 billion in California) and how the funds can be used. California has a process for approving projects and apportioning its allocation, and that approval process takes about 2 months to complete. Total time from application to dollars in hand is usually about 3 months.

Our IDB team prepares the application, up-front application fees totaling $3,100 and the business will have a fixed quote, time-table and structure for the project. A deposit is also required by the State that is collected upon completion of the application, and becomes only after the bond is approved by the State and is not sold.

How does an SBA 504 Loan work?

This loan is only available for businesses falling under the SBA's definition of a small business (in this case net worth under $7 million, and net revenue for the past two years of less than $2.5 million).

An SBA 504 loan is a loan in which a private lender (a bank usually) recommends a loan candidate for government money through the SBA (Small Business Administration). Generally speaking, the private lender will recommend candidates who fulfill the application requirements and who are looking to purchase fixed assets. These assets may include purchasing land and making improvements, buying long-term equipment and machinery, making street improvements and building parking lots, and renovating or converting existing facilities.

While 50% of the 504 loan is funded by the private lender, 40% comes from a CDC (Certified Development Company) and 10% is produced by the borrower. In addition to this, personal guarantees are required from the principal borrowers, along with financial records for both the company and the borrowers. A further condition for an SBA 504 loan is that it must create or retain a job for every $50,000 of money borrowed.

Collateral is generally the equipment and project assets purchased are used as collateral.

An SBA 504 loan has fees attached to it usually amounting to 3% of the loan, which can be paid off using the loan itself.

The interest rate is tied to an increment above the rate of current 5 and 10 year treasury bonds.

In some cases it may be possible to receive more than $1,500,000, by tailoring your business plan to meet a public policy goal in your community. These goals may include:

* increasing exports

* revitalizing a business district

* changes necessitated by governmental policy shifts

In addition, this benefit is also made available to certain businesses owned by veterans (especially service-disabled veterans) and women.

If your business meets one of these criteria, it may be possible to increase the loan amount to $2,000,000.

If your business falls under classifications 31, 32, and 33 of the North American Industrial Classification system, and all of its production facilities are located in the United States, then the debenture (amount of loan) may be increased to $4,000,000. In this case one job must be retained or created for every $100,000 of the loan.