Economic Development Finance

Wisconsin Basic Economic Development Course

Economic Development Finance

SLIDE

2

Wisconsin Basic

Economic Development

Course

Madison, WI

Nov 10-13,2008

Presenters:Presenters:

Moderator: Marcia Theusch, CEcD, MEDC

Panelists:

- Marianne Dickson, Wisconsin Women’s

Business Initiative Corporation

- Dana Hoffmann, Great WI Credit Union

- Deb Clements, Dept. of Commerce

- Steve Kohl, WI Business Development

- George Krueger, Platteville Industrial Devt.

- Joe Kremer, WI Angel Network

SLIDE

3

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Access to CapitalAccess to Capital

Debt Financing:

- From Banks, Credit Unions, Savings and loans

- Mortgages, term notes, and lines of credit

- Credit, collateral and cash flow

- Equity Financing:

- From founder, friends and family

- Angel Investors and Venture Investors

- Rate of return on investment

SLIDE

4

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

ED FinancingED Financing

Economic Development Financing -“GAP” financing:

• Bridges gaps in private sector market.

• Does not supplant the private lender/financing.

• Leverages private investment.

Public Financing Goals:

• Mitigate risk of bank

• Lower cost of borrowing for customer.

• Create jobs and tax base for community.

SLIDE

5

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Case Study 1: Studio 305Case Study 1: Studio 305

• Early stage company, ‘graduating’ from incubator

office to leased office.

• Type of business: graphics design,

marketing/promotional items.

• Ownership: female/minority.

• Three years in business, 2.5 staff

SLIDE

6

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Studio 305 Financing Studio 305 Financing Financing NeedsFinancing Needs

• Office Furniture, printer, computer, phone, internet access, new stationary, business cards, lease down payment, with some working capital reserves.

• She also has 10,000 in business credit card debt that she would like refinanced.

Total: $60,000

SLIDE

7

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

WWBIC Microloan

Owner Equity

TOTAL

FFE & Equipment

36,000

4,000

40,000

Working Capital

9,000

1,000

10,000

Refinance Credit Card Debt

9000

1,000

10,000

Total $54,000 $6,000 $60,000

Studio 305 – Studio 305 – Financing OptionsFinancing Options

SLIDE

8

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Studio 305 – Discussion Studio 305 – Discussion QuestionsQuestions

• WWBIC Term and Amortization?

• WWBIC Collateral requirements?

• Is owner equity required?

• Could a bank do all or part of this deal? Use SBA??

• Would local ED programs be available?? Commerce??

• Is credit score considered? Other fact credit factors?

• Familiar with incubator concept??

SLIDE

9

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Case Study 2: KemKleen Case Study 2: KemKleen

• An existing company (7 yrs old) with new process for

chemically cleaning equipment in a variety of industrial

settings. (Process meets new EPA requirements).

• Two customers have beta-tested the process and are

pleased with the results.

• Funding is needed for mfg machine, inventory, working

capital, sales and marketing.

• Ten new jobs with expansion.

SLIDE

10

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Kemkleen Financing NeedsKemkleen Financing Needs

Equipment $300,000

Sales and marketing 150,000

Working capital, inventory 300,000

Total: $750,000

SLIDE

11

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

KemKleen Financing OptionsKemKleen Financing Options

Bank Bank/Line

of Credit

Dept. of

Commerce

Customers Owner

Equity

Equipment 275,000 25,000

Working

Capital

150,000 50,000

Working

Capital

100,000

Sales &

Marketing

150,000

Total 275,000 150,000 100,000 150,000 75,000 750,000

37% 20% 13% 20% `10%

SLIDE

12

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Kemkleen - Discussion QuestionsKemkleen - Discussion Questions

• Where is the gap??

• Who finances working capital??

• Isn’t sales and marketing working capital?

• Bank terms and collateral requirements?

• Commerce terms and collateral requirements?

• Role of customers/investors: expect return? Subordinate?

• Are the customers angel investors ?

• What if customers are not willing to invest?

SLIDE

13

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Case Study 3 – Wisconsin Case Study 3 – Wisconsin Manufacturing, IncManufacturing, Inc. .

• An established manufacturer needs to

expand production of new product line.

• Expanding building with 18,000 square feet.

• Adding additional equipment.

• Twenty new jobs projected.

SLIDE

14

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Wisconsin Manufacturing, Inc. -- Wisconsin Manufacturing, Inc. --

Financing Needs Financing Needs

• Building Renovations $1,000,000

• Equipment 500,000

• Term Working Capital 250,000

Total $1,750,000

SLIDE

15

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Wisconsin Manufacturing Inc. -- Wisconsin Manufacturing Inc. -- Financing OptionsFinancing Options

Bank Local

RLF

Bank

SBA 7A

Owner

Equity

Total

Building

Renovation900,000 100,000 1,000,000

Equipment 450,000 50,000 500,000

Term

Working

Capital

225,000 25,000 250,000

Total 900,000 450,000 225,000 175,000 1,750,000

SLIDE

16

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Wisconsin Manufacturing, Inc. --Wisconsin Manufacturing, Inc. --Discussion QuestionsDiscussion Questions

• Where’s the “gap”?

• Is building expansion reasonable cost?

• RLF terms and collateral?

• Role for local ED organization?

• What is ‘term’ working capital vs. line of credit?

• Owner equity – 10%

• SBA Role?

SLIDE

17

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Case Study – Day Care Case Study – Day Care

Startup Daycare:

• Need in the community: 546 kids of day care age, 56 certified day care slots.

• Existing day care is willing to operate third facility

• Decide to build new building and lease to operator

• Financing needs:

• Construction $300,000

• Furniture, equipment 25,000

• Working Capital 25,000

SLIDE

18

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Break Break

Group discussion on case study

—day care

SLIDE

19

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Day Care Financing Options—Day Care Financing Options—Small Group Responses Small Group Responses

Construction

FFE

Working

capital

SLIDE

20

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Day Care Financing—The rest Day Care Financing—The rest of the story of the story

• Day care was non profit.

• Extensive market research was completed.

• SWCAP built the facility and leased to an experienced

operator. (Lease covered mortgage payment)

• The local EDC provided 20% of financing.

• Forward Community Investment (FCI) provided 80% of

financing.

• Day care provided furniture and equipment.

SLIDE

21

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

SBA 504 ProgramSBA 504 Program

•Fixed asset financing

•In partnership with a commercial lender

•SBA 504 subordinate portion:

• Usually 30% to 40% of project

• Funded with Long Term Debenture

• Competitive Fixed Rate

•Public Policy:

• Creating / Retaining Jobs

SLIDE

22

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

SBA 504 ProgramSBA 504 Program

Borrower10%-20% down payment

project cost cash/land equity

Borrower10%-20% down payment

project cost cash/land equity

WBD504 is up to 40%

debenture 2nd lien ten or twenty year fixed rate

WBD504 is up to 40%

debenture 2nd lien ten or twenty year fixed rate

SBAGuarantees 504

debenture collects ½% from bank

on 1st lien/one time

SBAGuarantees 504

debenture collects ½% from bank

on 1st lien/one time

BankUp to 50% 1st lien,

Not SBA guaranteed

BankUp to 50% 1st lien,

Not SBA guaranteed

504504

SLIDE

23

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

• Competitive long term fixed rate

• Low down payment

• Conserve working capital

• Position the business to:

• Weather the storm in an economic slowdown

• Respond to the cash flow demand of growth

SBA 504 AdvantagesSBA 504 Advantages

SLIDE

24

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

SBA 504 Case Study SBA 504 Case Study

• An established chiropractor is looking to build a new office in the same market area.

• Project includes the purchase of land, the construction of the new facility and the purchase and installation of equipment.

• Project Financing Needs:

• Land $ 100,000

• Construction $ 800,000

• Equipment $ 300,000

SLIDE

25

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

SBA 504 Case Study-SBA 504 Case Study-Financing OptionsFinancing Options

Uses of Funds $ Sources of

funds

$ %

Land 100,000 Bank 600,000 50%

Construction 800,000 SBA504/WBD 480,000 40%

Equipment 300,000

Borrower’s

Equity 120,000 10%

Total 1,200,000 1,200,000

SLIDE

26

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

SBA 504 – SBA 504 – Discussion QuestionsDiscussion Questions

• All one project??

• Bank term and collateral?

• SBA 504 term and collateral?

• SBA fees?

• Best projects for SBA 504?

SLIDE

27

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Other Financing ResourcesOther Financing Resources

• Community Reinvestment Fund (WBD)

• New Markets Tax Credits --2008 Allocatees:

• WI Community Devt./Legacy Fund ($100mm)

• WI Business Growth Funds (WBD) ($30mm)

• MEDC ($50mm)

• Johnson Bank ($40mm)

• See: www.cdfifund.gov

SLIDE

28

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Equity Investing – BootstrappingEquity Investing – Bootstrapping

• Funds from you, friends and family

• Savings, home equity, credit cards

• Lease where possible

• Sell, sell, sell

• Postpone paying yourself—keep your day-job

• See: www.bootstrapit.com

SLIDE

29

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Equity Financing - AngelsEquity Financing - Angels

• Average investment is $50,000-$1million

• Early stage businesses with a basic concept and business strategy are most eligible

• High net-worth individuals investing separately or as a group

• Eligible for tax credits if apply to Commerce and are certified.

• See: Wisconsin Angel Network

www.wisconsinangelnetwork.com

SLIDE

30

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Equity Financing – Equity Financing –

VentureVenture Capital Capital

• Average investment $2-8 Million

• Less than 1% of all startups are VC funded

• Typically a managed fund makes the investment

• Seek a rate of return averaging 20:1

• VC’s will have representation on Board and

ownership in company

SLIDE

31

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Email contactsEmail contacts: :

Marcia Theusch: [email protected]

Marianne Dickson [email protected]

Dana Hoffmann [email protected]

Deb Clements [email protected]

Steve Kohl [email protected]

George Krueger [email protected]

Joe Kremer [email protected]

SLIDE

32

Wisconsin Basic


Course

Madison, WI

Nov 10-13,2008

Welcome

to the world of


Finance!!

Documents

Economic Development Finance