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Business Financing in Southwestern Illinois
Listed below are samples of the business financing programs which Southwestern Illinois and the State of Illinois could utilize to work with a business to enable it to cost-effectively locate and expand its operations within the region. These programs can potentially be blended together with private funding to finance the company's proposed project. Each program described below is available throughout the entire Southwestern Illinois.
Southwestern Illinois Development Authority (SWIDA)
SWIDA was created by action of the Illinois General Assembly and the Governor in 1987. Tax-Exempt revenue bonds are available through SWIDA but are limited by federal law to selected purposes including not-for-profit organization objectives, pollution control, solid waste facilities, transportation and small issue manufacturing companies. Interest on tax-exempt bonds is exempt from federal income tax, and therefore attracts a much lower rate than conventional financing.
SWIDA can also issue taxable revenue bonds for commercial, industrial, and recreational projects that are not eligible for tax-exempt financing. Taxable bond rates generally run two to two and one-half points higher than tax-exempts. Proceeds can be used to purchase land, buildings and equipment, and to construct new or renovate existing facilities. Taxable bonds provide the ability to borrow money for a longer term and at a lower rate of interest than alternative forms of taxable financing.
The issuance of revenue bonds through SWIDA provides the following benefits:
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The advantage of longer and more flexible debt repayment periods and lower interest rates than conventional financing;
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A moral obligation commitment of the State of Illinois (optional);
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The availability of unlimited dollar amounts for project activities with no fixed minimum job creation or capital investment requirements; and
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All SWIDA bonds are exempt from state taxation.
SWIDA also administers the Southwestern Illinois Community Development Corporation (SWICDC) which was created to provide "gap" financing at market rates to small businesses when conventional lenders are unwilling to assume 100 percent of the risk of financing or when the small business's project does not meet the requirements of Madison or St. Clair Counties' Job Creation Loan Programs. The SWICDC concentrates on small to medium sized businesses that require capital for modernization, physical rehabilitation of their facilities or cash flow to make them more economically viable. The SWICDC will make loans between $50,000 and $500,000 but will not be the primary lender. A private financial institution must lend a majority of the necessary funds and must sponsor the SWICDC loan application.
For more information, contact:
Mike Lundy, Executive Director
SWIDA
1022 East Port Plaza Drive
Collinsville, IL 62234
618-345-3400
Madison and St. Clair Counties' Economic Development Loan Programs
Madison and St. Clair Counties' Economic Development Loan Programs provide direct financing to businesses at a below-market interest rate in cooperation with private sector lenders. The purpose of the programs is to provide "gap" financing to expanding or new firms whose projects create permanent jobs for existing qualified low or moderate income individuals within Southwestern Illinois.
Under the Loan Programs, loans are typically made in the amount of $100,000 or between 10-25-49 percent of the business' total project costs, whichever is less (in special cases where there is substantial job creation, a larger loan amount may be allowed contingent on County Board approval). The loan funds are normally provided at a rate of 3-5 percent interest for a term of five to seven years. The remaining 51-90 percent of the total project costs must be provided by the business' participating lending institutions and its equity investment.
The program's loan funds can be used for:
- Acquisition of real estate (land or buildings);
- Construction, renovation and rehabilitation improvements;
- Purchase or installation of machinery and equipment; and
- Working capital.
The Loan Programs' highest priority is to create jobs. Businesses that receive a low interest loan are expected to create at least one full-time equivalent job for an existing low or moderate income individual for every $10,000 of loan funds provided to the company.
U.S. Department of Agriculture Rural Development's Business and Industrial Loan Program
The Business and Industrial Loan Program is designed to assist eligible public and private organizations in rural areas to obtain quality loans for the purpose of improving, developing, or financing business, industry, and employment, as well as improving the economic climate in rural communities. Specifically, the program provides Rural Development's guaranties on loans to businesses in rural areas. Guaranties normally cover up to 80 percent of the principal advanced and are limited to a maximum of $10 million. The guaranteed loan funds may be used for the following: finance business and industrial acquisition, construction, conversion, enlargement, repair, modernization, and development costs; purchase and development of land, easements, right-of-way, buildings, facilities, leases, and materials; purchase equipment, leasehold improvements, machinery, and supplies; pollution control and abatement; and working capital.
The Illinois Finance Authority (IFA)
The Illinois Finance Authority (IFA) is a self-supporting state agency created to stimulate economic development and provide jobs for Illinois residents. Their loan programs include their revenue bond financing and participation lending programs.
IFA Taxable and Tax Exempt Revenue Bonds: IFA is empowered to issue both tax exempt and taxable bonds as is SWIDA. Please see Section A. for a description of taxable and tax- exempt revenue bonds.
IFA Participation Lending Program: IFA established this program to assist banks in lending to Illinois businesses that create or retain jobs but may be unable to obtain sufficient financing through conventional sources. Through this program, IFA will purchase up to the lessor of $300,000 or 50 percent participation directly from the bank. Participation loans can finance the purchase of land and buildings, construction and renovation of buildings and the acquisition of machinery and equipment. Interest rates will be 150 basis points below the rate charged to the borrower by the bank, resulting in a lower blended rate on the loan. If the loan carries an SBA 7(a) guarantee, an additional 50 basis points may be subtracted from the bank lending rate. If the maturity of the bank's loan exceeds 10 years, IFA requires a balloon payment at the end of 10 years. Banks may retain 50 basis points as a servicing fee, but the remaining 100 basis points (or 150 basis points if it is a SBA 7(a) loan) must be passed on to the borrower.
Illinois Department of Commerce and Economic Opportunity (DCEO) Small Business Development Loan Programs
Participation Loan Programs: DCEO has designed these programs to encourage lenders (banks or development corporations) to make loans, which they would not normally make, to small businesses whose projects have the potential to create or retain substantial employment opportunities or modernize or improve the competitiveness of the borrowers. DCEO can participate in small business loans up to 25 percent of the total amount of a project, but not less than $10,000 or more than $750,000. Minority, Women and Disabled Participants may not exceed 50 percent of the project, subject to the maximum of $50,000. DCEO's participation in a Development Corporation Loan must be less than 50 percent of the Development Corporation's Loan (Please note that SWIDA's CDC is a Development Corporation) not to exceed 25 percent of the total project or the $750,000 maximum. Funds available through the programs can be used for a number of business activities including purchase and installation of machinery and equipment, working capital, purchase of land, construction or renovation of buildings, etc. Funds cannot be used for debt refinancing or contingency funding. The lender will set its rate and terms according to its normal lending guidelines and DCEO will establish its terms and interest rate to be paid on its participation, which may or may not be the same as the rate charged by the lender. DCEO will, if necessary subordinate its lien position in the event of default to the primary financing institution but typically will not accept less than a second lien position.
Enterprise Zone Financing Program: Businesses located within an Enterprise Zone may apply for Illinois Department of Commerce and Economic Opportunity (DCEO) participation loans to fund their new projects. Participation loans for 25 percent of a business' project costs up to $750,000 are available at either fixed or variable rates that are priced 200 basis points below the Wall Street Journal Prime rate. DCEO will allow the participating financial institution to retain 50 basis points to cover the costs of servicing the loan or it may elect to pass along the 50 basis points to the borrower. DCEO's term shall match that of the participating bank, but in no event shall DCEO funds be amortized longer than 10 years unless there is a balloon payment provision. Ineligible uses of funds are debt refinancing and contingency funding. Eligible businesses include any for profit entity with less than 500 employees (or not dominant in its field) locating or expanding in an Enterprise Zone. There are no industry restrictions or job creation/retention requirements under this program. Participating financial institutions must enter into a Master Participation Agreement which outlines all terms and conditions of any loan participation between the financial institution and DCEO.
Capital Access Program: This program is designed to encourage lending institutions to make loans to businesses that do not qualify for conventional financing. CAP is based on a portfolio insurance concept where the borrower and DCEO each contribute a percentage of the loan amount into a reserve fund located at the lender's bank. This reserve fund enables the financial institution to make loans beyond its conventional risk threshold and is available to draw upon to recover losses on loans made under the program.
A CAP loan is a private market transaction between the lender and the borrower with all terms, fees, conditions, rates, collateral, etc., being determined by the lending bank. The borrower's non- refundable contribution to the reserve fund must be between 3 and 7 percent of the total loan amount. DCEO will provide a matching contribution. A 133 percent match to the borrower's contribution will be provided on the first $2,000,000 in CAP loans enrolled at the lender bank. A higher match will be provided to minority/woman/disabled owned businesses (150 percent). Loan proceeds can not be used for debt refinancing or for financing passive real estate ownership.
SBA 7(a) Loan Program
The United States' Small Business Administration 7(a) Loan Program is a guaranty loan program for small businesses. Through this program, the SBA guarantees a portion of a bank's loan to a small business. Loan proceeds can be used for a variety of business purposes including: working capital; inventory purchases; acquisition of machinery, furniture, fixtures and equipment; construction or remodeling of buildings; the acquisition of real estate; and in certain instances the refinancing of existing debt. Loan terms typically range from 7 to 25 years at market rates.
SBA 504 Loan Program
Typically, small businesses encounter difficulties when looking for long-term financing at fixed interest rates. Recognizing this, the SBA created the 504 loan program which offers small businesses a financing alternative. In Illinois, the Small Business Growth Corporation administers the 504 program. Generally, any small business project that involves the purchase, construction or improvement of fixed assets is eligible. Each 504 loan package has the following 3 elements:
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The Small Business Growth Corporation lends up to 40 percent of the total fixed asset financing need, to a maximum of $750,000-$1,000,000;
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a private lender, usually a bank, lends up to 50 percent of the project's total cost; and
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the business provides a minimum of 10 percent of the necessary funds.
The interest rate on the Small Business Growth Corporation's loan is fixed and generally a little above the rate of long-term Treasury Bonds. The loan maturity is 10 or 20 years. The interest rate on the companion bank is negotiated by the borrower and typically is floating. This combination of fixed and floating interest rate financing provides an effective hedge against unfavorable interest rate fluctuation. For every $35,000 that the Small Business Growth Corporation lends, reasonable projections should indicate that one full-time equivalent job will be created or retained over the next two years. For collateral, the Small Business Growth Corporation generally requires a second lien subordinate to the participating bank on assets acquired with loan proceeds and personal guarantees.
Southwestern Illinois Incentives:
• Southwestern Illinois
Development Authority
(SWIDA)
• Madison and St. Clair
Counties' Economic
DevelopmentLoan Program
• U.S. Department of
Agriculture Rural
Development's Business &
Industrial Loan Program
• The Illinois Finance
Authority (IFA)
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