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Economic Development Finance: Introduction to Economic Development Certificate Program October 13, 2010. California State University, Fresno University Business Center, Craig School of Business. PRESENTATION BY:. Paula Connors, Manager - Bond Finance Unit California Infrastructure and

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California state university fresno university business center craig school of business

Economic Development Finance:Introduction to Economic Development Certificate ProgramOctober 13, 2010

California State University, Fresno University Business Center,

Craig School of Business

Presentation by

Paula Connors, Manager - Bond Finance Unit

California Infrastructure and

Economic Development Bank

980 9th Street, 9th Floor, Sacramento, California 95814

Phone: (916) 322-1498 – Fax: (916) 322-6314


Dan Bronfman, President

Growth Capital Associates, Inc.

82 Estates Drive, Orinda, California 94563

Phone: (925) 386-0760 – Fax: (925) 386-0765


Financing basics for economic development
Financing Basics for Economic Development

Session Overview:

  • What is your ED Financing Environment?

  • Screen the Deal and Analyze the Deal

  • Financing Resources and Programs

  • Issues to Consider

  • Where to Get More Information

  • Handouts/Appendix


Understanding your ed environment
Understanding Your ED Environment

  • Need to understand all aspects of the project in order to tailor the proposed assistance

  • Each project will have its individual and unique needs.

  • Need a full toolbox, not just financing tools or incentives, to meet the needs of all projects.

Understanding your ed environment1
Understanding Your ED Environment

  • Most projects do not need financial assistance, but can use other assistance

  • Financing is only part of the equation

  • There is a tendency to throw money at projects without really understanding the project and its true needs.

Business financial analysis
Business Financial Analysis

I. The Process

II. Terms and Concepts

III. Tips for Doing the Deal

California state university fresno university business center craig school of business

The Process

  • The analysis depends on the need

  • Look at the business and the project

  • Examine the past, present and future financial information

  • The information tells a story about the business’ financial picture, operating cycle, trends, and ability to handle downturns

  • Reformat financial information

  • Determine key ratios, compare with industry averages and past performance

  • Analyze projections for reasonableness

  • Match funding to the “gap”

    • Cost of capital

    • Availability of capital

Types of business loans
Types of Business Loans

  • Short-term loans – working capital, inventory, accounts receivable.

  • Medium-term loans – equipment, machinery, leasehold improvements.

  • Long-term loans – building, acquisition, renovation, construction, land acquisition.

California state university fresno university business center craig school of business

Screen the Deal

  • Have the owner tell you their “story”

  • What is the business trying to finance?

  • Who does the business bank with?

    • Has the business applied for a loan with its bank?

    • If declined, why?

  • Is the business profitable?

  • Does the business owner have cash to put into the deal?

  • Do they have collateral to secure the loan?

  • Is there a business plan and financial information?

Sources and uses form snapshot of the proposed project
SOURCES AND USES FORM Snapshot of the Proposed Project

Analyze the deal
Analyze the Deal

  • “Spread” the Financial Statements: Horizontal and vertical analysis

  • Ratio Analysis - Key ratios

    • Current: current assets/current liabilities

    • Quick: cash + cash equivalents + accounts receivable/current liabilities

    • Debt-to-worth: total liabilities/net worth

  • Review projections and assumptions to business plan, historical data and industry data (make sure jobs are there)

  • Projections should be done with and without public assistance

  • Compare to industry averages (Robert Morris Associates - RMA)

  • Analyze business operating cycle

    • Cash – Inventory – Sales – Accounts Receivable – Cash

      --Automobiles – long cycle

      --Food Service – short cycle

  • Use tax returns to verify information

Analyze the deal1
Analyze the Deal

The C’s of Credit

When the analysis is done, you should be able to summarize the


Character business history, credit reports, personal interviews

Credit credit history, business history

Capacity analysis of financial statements, equity,

secondary sources of repayment

Capital equity, working capital) -

Remember “Cash is King”

Collateral appraisal, net worth

Cash Flow balance sheet, projected income statement,

personal financial statements

Conditions market study, business plan, economic conditions

Commitment business plan, equity committed

California state university fresno university business center craig school of business

II Terms and Concepts

What Are Financial Statements?

  • Income Statement

  • Balance Sheet

  • Statement of Cash Flows

California state university fresno university business center craig school of business

The Income Statement: How Did We Do?

(AKA…..Profit and Loss Statement; P& L)


-Cost of Goods Sold (raw materials, labor, manufacturing) Gross Profit

-Other Expenses

-SG&A (rent, advertising, admin. overhead, officer salaries

Net Income from Operations

+Other Income

-Income Tax

Net Income

The income statement how did we do
The Income Statement: How Did We Do?

Sample Income Statement


Sales $18,000

Investment Income 2,000

Total Revenue $20,000


Wages, Sal/Benefits $3,000

Merch & Supplies 12,000

Depreciation 400

Property 300

Income Tax 1,000

Interest Expense 300

Total Expenses <$17,000>

Net Income $3,000

Balance sheet snapshot in time assets liabilities equity
Balance Sheet: Snapshot in TimeAssets = Liabilities + Equity

Sample Balance Sheet


Current AssetsCurrent Liabilities

Cash 400 Accts Payable $300

Accts Rec. 200

Total Current Assets $600 Long Term Liabilities

Loan Payable 200

Total Liabilities $500

Fixed AssetsOwners Equity $1,500

Land $1,000

Bldg. 500

Equip. 900


Total Assets $3,000Total Liab. & Equity. $3,000

California state university fresno university business center craig school of business

Key Ratios to Remember

Current Ratio

  • Current Ratio:CA: Current Assets

  • CL: Current Liabilities

  • Measures liquidity

  • Should be greater than 1:1, preferably 1:5 or 2:1 depending on industry

  • Quick Ratio:Cash + Accounts Receivable

  • Current Liabilities

  • Measures relationship of short term debt to very liquid (cash) assets

California state university fresno university business center craig school of business

Key Ratios to Remember

Working Capital

Current AssetsCA

Current Liab. - CL

Working Capital WC

California state university fresno university business center craig school of business

Key Ratios to Remember


  • Total Liabilities

  • Equity

  • Relationship of investment of owners to investment of lenders

  • 2:1

  • High: little investment by owners

  • Low: May not be a good use of debt

  • Strike a balance

  • When you have nothing but an idea and ambition
    When you have nothing but an idea and ambition:

    • Limited funding options

    • Personal Savings: crack open the piggy bank, max out credit cards, get a second mortgage on the house

    • Beg & Borrow: call rich friends/relatives;offer a stake in return for an investment;be clear about risks

    • Loans: tough sell; personal assets as collateral; have to make payments NOW

    • Angel Investors: $ and expertise; where do you find them??

    • SBA: guidance, not loans

    Once you have a product you have more options
    Once you have a product, you have more options:

    • Traditional Lenders and Programs

    Financing resources




    CA Loan Guarantee

    USDA Loan Guarantee



    Local RLF’s

    PERS Private Equity

    Real Estate







    US EDA


    Business Impr. Districts

    Financing Resources

    Small business administration
    Small Business Administration

    504 Loan Program: Long term, fixed asset financing used for land acquisition, building construction, purchase of existing building, site improvements, rehabilitation and major equipment acquisition.

    How it works: 50% Private Lender

    40% Debenture

    10% Equity Injection

    * Packaged through certified development corporations

    Hot off the press new sba changes
    Hot off the Press –NEW SBA changes

    • Fee reductions:  504 fee waivers for banks (.5%) and borrowers (1.5%) were extended through Dec. 31, 2010, or until the $505 million appropriated is used.  

      Additional opportunities to be rolled out as SBA fine-tunes policy:

    • Increased Loan Maximum:  maximum loan size permanently increased to $5 million ($5.5 million for manufacturers and energy loans).

    • Debt Refinancing: for the next 2 years allows refinance of real estate loans coming due on owner-occupied commercial property. It enables refinancing of qualified existing debt without business expansion.

    • First Mortgage Pooling program: Extends the first-mortgage pooling program two years.

    • Alternative Size Standard: establishes a standard of maximum tangible net worth of $15 million and 2-year average net income after federal income tax of $5 million, which will apply to both programs.

    Small business administration1
    Small Business Administration

    • Low Doc Loan Program: A streamlined lending process for loans up to $150,000, same uses as 7(a) program.

      Structure: SBA guarantees 85% of commercial lender loan.

    • Caplines Loan Program: An umbrella program under which SBA helps small businesses meet their short-term and cyclical working capital needs.

      Structure: SBA guarantees 80% of commercial lender loans less than $100,000 and 75% of loans greater than $100,000.

    • Micro Loan Program: SBA provides funds to selected non-profits, who in turn make loans to eligible borrowers in amounts that range from $1,000 to $35,000; uses include working capital, equipment, supplies, etc.

      Structure: Loans are made by non-profit for a maximum 5-year term with fixed rate of interest.

    Small business administration2
    Small Business Administration

    7(a) Loan Program: SBA’s primary loan program used for business acquisition, leasehold improvements, real estate, equipment, working capital, and investing.

    How it works: SBA guarantees 75% of

    commercial lender loan.

    California loan guarantee program
    California Loan Guarantee Program

    Program enables small businesses to obtain a term loan or lines of credit when it cannot otherwise get a loan. Uses include equipment, construction financing, business expansion and working capital.

    Structure: Commercial lender loans are guaranteed up to 90% not to exceed $500,000 on term loans and lines of credit.

    • Packaged through 11 State Small Business Corporations

    Industrial development bonds


    Industrial Development Bonds

    Local Cities



    Job-creating businesses


    Community organizations

    More than manufacturing

    More than Manufacturing!

    Industrial Development Bonds: Manufacturing and job creation

    Nonprofit 501( c ) 3:

    Community-based, community-

    wide benefits

    Exempt facility, Pollution Control:

    Environmental and economic



    • $10 million to relocate and expand a precision machine tools manufacturer

    • $ 6 million to purchase and equip a new processing plant for a specialty foods manufacturer

    • $5.5 million to expand a gourmet baked goods company

    Industrial development bonds1
    Industrial Development Bonds

    • Tax-exempt financing (up to $10 million) for manufacturing.

    • Uses include acquisition of land, building, and new equipment.

    • Tax-exempt bond results in borrowing costs 20-30% below comparable bank rates.

    • Obligation to repay is solely that of the borrower - not the Issuer or the jurisdiction

    Industrial development bonds2
    Industrial Development Bonds

    • How it works: An Industrial development issuer issues bonds, loans proceeds to the company. Company’s repayment is secured by a letter of credit from its bank.

    • Step 1:

      • Screen the project

      • Reimbursement Resolution

    Industrial development bonds3
    Industrial Development Bonds

    • Step 2:

      • Borrower/Financial Advisor/Issuer work with lenders/purchasers to structure financing

      • TEFRA hearing

      • (Local adoption of resolution to join JPA – if required)

      • Volume cap/CIDFAC state approvals (if required)

      • Bond closing similar to loan closing

        • Many documents to sign

        • Bonds “sold” ; proceeds to trustee to disburse to borrower

    Industrial development bonds4
    Industrial Development Bonds

    Typical structure 70% IDB

    30% Equity Injection

    New markets tax credit
    New Markets Tax Credit

    • Community Development Entities make loans, investments or financial counseling in “Low Income Communities”

    • Funding comes from a federal tax credit for equity investments in Community Development Entities

    Usda business and industry guaranteed loan program
    USDA Business and Industry Guaranteed Loan Program

    In rural areas only, the program provides a loan guarantee of a commercial lender loan. Uses may be working capital, machinery, equipment, building acquisition and development.

    How it works: Up to a 80% guarantee of a loan made by a commercial lender

    California i bank infrastructure state revolving fund program
    California I-BankInfrastructure State Revolving Fund Program

    Program provides low cost loans to public agencies for a wide variety of infrastructure projects. Amounts range from $250,000 to $10,000,000; with loan terms up to 30 years.

    Community development block grant
    Community Development Block Grant

    • Business and development loans

    • Infrastructure grants

    • Establish local revolving loan funds

    • Entitlement and Non-Entitlement Programs

    • Federal and state overlay requirements

    Community development block grant1
    Community Development Block Grant

    • Non-Entitlement (State Program)

      • Over The Counter

      • Revolving Loan Fund

      • Planning & Technical Assistance Grants

  • Project must meet national objective

    • Benefit Low/Mod

    • Eliminate Slums and Blight

    • Urgent Need (Disaster relief)

  • Redevelopment locally controlled
    Redevelopment(locally controlled)

    • Can provide loans, acquire land, sell land, ground lease land, assemble sites, write-down costs, provide infrastructure

    • Potential for eminent domain authority.

    • AB1290 Restrictions – Redevelopment Agencies are prohibited from providing direct assistance to:

      • Auto dealerships on land that has not been previously developed.

      • A development on land of 5 acres, not previously developed, that will generate sales tax, unless principal use of site is office, hotel, manufacturing or industrial.

      • Does not prevent an Agency from assisting with cost of public improvements that are of area-wide benefit and that may incidentally benefit auto dealers/retailers.

      • All spending must be in project area, with few exceptions; and must be tied to the elimination of blight.

    Fiscal impacts prevailing wage incentives
    FISCAL IMPACTSPrevailing WageIncentives

    Prevailing wage
    Prevailing Wage

    • SB975 has changed the way agencies assist businesses and developers.

    • Prevailing wages may have to be paid on private projects when they receive public assistance

    • SB 975: prevailing wages triggered when construction work is paid in whole or part with public funds


    • Incentives are provided to have a project move forward that might not otherwise proceed. Incentives can be justified as follows:

      • As an inducement to an action

      • Unavailability of capital

      • Cost of capital

      • Rate of return


    • Incentives can vary depending on need of project. Incentives can include:

      • Financing

      • Land or Land Write-downs

      • Tax Rebates/Tax Credit

      • Paying/Waiving of Fees

      • Training/Retraining Funds

      • Streamlined/Expedited Permit Process

      • Infrastructure

      • Master environmental/planning documents

    Checklist for evaluating incentives
    Checklist for Evaluating Incentives

    • Quantify the benefits of the project (jobs, quality of jobs, taxes, etc.)

    • Determine the pay back period

    • Assess opportunity costs to the community (alternative use and benefits of the funds)

    • Match the level of incentive to the component of private investment

    • Require an increase in project benefit in exchange for an increase in community investment

    • Evaluate after the fact to see if projected benefits were received

    Iii tips for doing the deal

    • Tips for working with businesses

    • Tips for working with lenders

    • Tips for working with start ups

    California state university fresno university business center craig school of business

    Tips for Working with Businesses

    • Have your meeting at the business

    • Explain your role up-front

    • Confidentiality

    • Give them a chance to tell their story

    • Don’t nickel and dime with questions/concerns

    • Stay in communication

    • Don’t waste their time if project is not feasible

    Tips for working with lenders
    Tips for Working with Lenders

    • Understand credit score models

    • Don Quixote Rule (Don’t tilt at windmills; don’t ask them to do the impossible)

    • Understand credit score models

    • Be honest with your banker

    • Use your banker as a third-party to say no to a deal

    • Berlitz Rule (Speak Their Language)

    • Herb Cohen Rule (Be a good negotiator)

    • Boy Scout Rule (Be prepared)

    • Elephant Rule (Bankers Never Forget)

    Tips for working working with start ups
    Tips for Working Working with Start-ups

    • They must have equity (AKA cash) in the deal

    • They must have a business plan and financial projections.

    • Is there any collateral available? (including personal residence)

    • Help them get “HELP”

    • Know your local non-profit lenders (if you are not one yourself)

    Where to get more information

    Where to Get More Information

    California Enterprise Development Authority

    California Infrastructure and Economic Development Bank

    International Economic Development Council (IEDC)

    Economic Development Finance Service (NADO)

    Small Business Development Centers

    Robert Morris Associates

    National Development Council

    MANEX: Corporation for Manufacturing Excellence

    Evaluating results how do you measure success
    EVALUATING RESULTSHow Do You Measure Success?

    • Commencement of project

    • Aesthetic appeal

    • Community impact

    • Economic impact

    • Subsequent project with same business or developer

    • Business repays loans

    • Business stays open longer than one year