Ever heard of tax exempt
bonds to fund private, for-profit businesses? Neither have I until this week.
Typically, when I hear about tax exempt bonds, I think municipal bonds issued by a city, school district, or some other government, not-for-profit agency below the state level. These organizations issue these bonds to raise money for certain projects in their area or region. These tax except issues allow these agencies to raise funds at lower interest rates. Their investors receive exceptions from Federal & State taxes. Win – Win for everyone.
So, can these same tax exempt bonds be used to fund, at lower interest rates, for-profit, private businesses? YES.
According to the Council of Development Finance Agencies, these Private Activity Bonds (PABs) are a mandate from the federal government which allows individual states to issue tax exempt bonds for the benefit of private entities within their state. In other words, each state is allowed a certain amount of private bonds it can issue to private companies or individuals under a tax exemption status – allowing these businesses a means to finance certain projects at lower interest rates than traditional financing. The amount of funds each state can raise is set by the federal government (call volume cap) and the “qualified” companies that can receive funds from these exempt bonds are set by Section 141 of the Internal Revenue Code.
Additionally, each state can then allocate their volume cap and issue these tax exempt bonds by any means they deem appropriate. However, most states mandate certain requirements for these bonds; in particular job creation within the state.
While the majority of these bonds are issued to help promote public interests like low-income housing, commuting facilities, or water, sewage, & waste disposal services, these bonds can also be used to help local, private manufacturers grow and expand.
The only real downside for these bonds is that they are very expensive to issue, which falls on the private business or individual to finance. Thus, most bonds are not issued on behalf of private businesses for amounts less than $3 million.
So, if you are a growing business who expects to create a fair amount of new jobs in the coming year, this may be a great, cost effective way to raise the funds your business needs. If your business “qualifies”, expect a fixed interest rate between 5% to 6% – a far cry better than the high variable rates charged for traditional bank financing.
Your business should either be a manufacturing company or a business that provides or intends to provide products or services to the benefit of the general public.
Examples of Funding:
In 2005, the State of Ohio set aside $100 million for small business bond issues.
- A Precast Concrete Structure Company – raised $2.3 Million.
- A Furniture Manufacturing Company – raised $5.0 Million.
- A Manufacturing Plant – raised $4 Million.
Just to name a few.
Even when times are good, it really behooves growing small and medium sized businesses to pursue every available financing option they have available to them. The manufacturing plant, mentioned above, raised $4 Million at a 20-year, fixed rate of 5.125%. This would result in approximately $205,000 in interest plus fees in the first year. On the other hand, had this business sought traditional financing, with rates hovering around prime + 4% or 8%, it would have paid in the first year approximately $317,000 in interest plus fees. All in all, a substantial savings in financing costs.
Bottom line: the money raised is the same in any situation. It can be spent the same way and buy the same things, but the cost of those funds can really be reduced using tax except bonds.
To find out if your business qualifies or just to get additional information either contact your state’s Economic Development Agency or speak with your local Chamber of Commerce; who should be able to point you in the right direction.