While not appropriate for every business owner, government bond programs present an attractive financing option for some entrepreneurs. If your company is undertaking a project that will generate new jobs, save existing jobs, or contribute to the local tax base, you may be eligible for a mini-bond.
One option is the Industrial Development Revenue Bond (IDRB) program. IDRBs are issued by local government agencies to fund large industrial projects. If you are approved for an IDRB, a government agency will issue bonds on your behalf, which will then be purchased by private investors. You use the proceeds of the sale to finance your project. You must pay back the principal of the bond as well as the interest to the development agency. These bonds are designed for large projects, and notoriously carry greater processing costs due to transactional complexities.
For smaller projects there are tax-exempt “mini-bond” programs, which offer significantly reduced processing fees and lower interest rates, with typical savings of 1.5 to 2 percent over traditional loans. Mini-bonds are open to manufacturers and 501(c)(3) organizations. Tax-exempt mini-bonds offer financing from $500,000 to $2 million.
While mini-bonds are tailored for independent business owners, the approval process follows that of conventional loans. Read about the Elements of a Successful Business Loan Application. Applicants must demonstrate creditworthiness and strong personal financials. There are three main steps to the mini-bond process:
- Initially, the issuing agency will prequalify applicants to determine eligibility, and to ensure that the funds will be used for a project that meets the program’s objectives. After an applicant is deemed eligible, terms are negotiated that best meet the borrower’s needs. One of the advantages of mini-bonds is that the repayment terms are much longer than conventional loans.
- The second step in the process is completing the application and assembling supporting documents, including project costs and detailed financial statements. Each issuing agency has its own set of requirements for bond allocation. Will your project generate new jobs or save existing jobs? Will it make a significant contribution to the local tax base?
- If the application is approved, the final stage of the process is the closing. At closing the bond funds are transferred into an escrow account from which the borrower can withdraw as funds are needed. Each state has its own agency that issues these bonds; however, the specific office varies by state. Your local Department of Economic Development or Department of Commerce will probably be your contact point for IDRBs and mini-bond issues.