Capital

Chapter 21

What are some key considerations regarding financing?

The search for financing is similar to any other aspect of your business in that it takes time and effort to research the sources right for you. Examine your needs, plan how the funding will be utilized, and study what is available. The ability to secure sufficient funds to start and grow your business depends strongly on your preparation and demonstrated capacity to manage those funds efficiently and effectively.

Sufficient and ready capital is essential

While poor management is cited most frequently as the catalyst for business failures, inadequate or ill-times financing is a close second. It is simply not enough to have sufficient financing. You need to have the knowledge and planning ability to manage it well. That means avoiding such common mistakes as securing the wrong type of financing, overestimating or underestimating the amount required or the cost of borrowing money, and then finding it difficult to repay.

Before inquiring about financing, ask yourself the following:

  • Do I really need additional capital or do I have a need to manage my existing cash flow more effectively?
  • How do I define my need? Do I need money to expand or for a cushion against risk or failure?
  • How urgent is my need? You can obtain the best terms when you anticipate you needs rather than looking for money in a crunch.
  • How great are my risks? All money needs have risks, and the degree of risk will affect cost and available alternatives.
  • In what state of development is my business? Needs are most critical during stages of transition. The three broadest are start-up, growth and maturity.
  • For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
  • What are the conditions in my industry? Depressed, stable or growth conditions require different approaches to money needs and sources. Those businesses that prosper while others and the market are in decline will often receive better economic terms when obtaining funding.
  • Is my business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
  • How strong is my management team? Management is the most important element assessed by money sources.
  • Perhaps most importantly, how does my need for financing mesh with my business plan? If you don't have a business plan, make it a first priority. All capital sources will want to see how you have articulated plans for the start-up and growth of your business.

 

Chapter 22

How do the sources of financing differ?

Not All Money Is The Same

There are two types of financing: equity and debt financing. When looking for financing to meet your needs, it is important to consider your company's debt-to-equity ration - the measurement between dollars you've borrowed and dollars you have injected into the business. The more money owners invest in their business, the easier it is to attract financing.

If your firm has a high proportion of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt- to-equity, experts advise that you increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.

22.1 Equity Financing

Most small or growth-stage businesses use equity financing in a limited way. As with debt financing, most of the time additional equity comes from non-professional investors such as friends, relatives, employees, customers or industry colleagues. However, the most common source of professional equity funding is that group of investors known as venture capitalists.

Venture capitalists are institutional risk takers and may be groups of wealthy individuals, government-assisted sources or major financial institutions. Most specialize in one or a few closely related industries. While public perception of venture capitalists may be of deep-pocketed financial gurus looking for "that hot new business" in which to invest their money, in reality they most often prefer three-to-five-year old companies that offer the potential to become major regional or national concerns and return higher-than-average profits to their shareholders.

Venture capitalists may scrutinize thousands of potential investments annually, while investing ultimately in only a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and growth of the industry are also major concerns.

Venture capitalists differ in their approach to management of the business in which they invest. They generally prefer to passively influence a business, but will react when a business does not perform as expected and may insist on changes in management or strategies.

Relinquishing some of the decision making and some of the potential for profits comprise the major downside to equity financing. If venture capital financing still seems like the ideal source of funding for your business, you may contact these investors directly, although they are known to make most of their investments through referrals.

The SBA also licenses Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies (MSBIs), which offer equity financing. Apple Computer, Federal Express and Nike Shoes received financing from SBICs at critical stages of their growth.

22.2 Debt Financing

There are many potential sources for debt financing. Banks, savings and loans, commercial finance companies and the U.S. Small Business Administration (SBA) are among the traditional sources. Over the last decade, the growing recognition of the contributions small firms make to the economy has stimulated the development of an increasing array of programs offered by state and local governments.

There is another important source for financing frequently overlooked by small business owners and prospective entrepreneurs. Family members, friends, and former associates are a potential financing source, especially where the capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit and single purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms.

The SBA guaranteed lending program provides banks (and non-bank lenders) with the incentive to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally which defined their needs and managed their loan processes effectively.

The SBA does not offer grants. The SBA offers loans or loan guarantees, and like any other lender, applications are evaluated based on the prospective ability of applicants to repay the loan proceeds from their future income.

Whether pursuing a loan from a traditional lender or an SBA lender, prospective borrowers should be equipped with a business plan, profit and loss statements, tax returns for the last three years and a current balance sheet, and should be able to articulate the need for the loan and demonstrate the ability for repayment. Evidence of strong management is another plus. These requirements will vary if one business is a start-up compared to an existing business. Established businesses are expected to provide one-third of the equity injection, while the requirement for start-ups could be 50 percent or more.

In addition to the equity injection, lenders commonly require the borrower's personal guarantees to protect the lender in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a scary, but inherently necessary disposition.

Source: U.S. Small Business Administration

 

Chapter 23

Are there any specific resources for Value Added Ag ventures in Iowa?

The State of Iowa offers the Value-Added Agricultural Products and Processes Financial Assistance Program (VAAPFAP) which seeks to increase the innovative utilization of Iowa's agricultural commodities. It accomplishes this by investing in the development of new agri-products and new processing technologies.

The program includes two components:

  • Innovative Products and Processes encourages the processing of agricultural commodities into higher-value products not commonly produced in Iowa, or utilizing a process not commonly used in Iowa to produce new and innovative products from agricultural commodities.
    • Renewable Fuels and Co-Products encourages the production of renewable fuels, such as soy diesel and ethanol, and co-products for livestock feed.

Program Eligibility Requirements:

  • The proposed project must be located in Iowa.
  • The business must have a business plan demonstrating a viable market, and managerial and technical experience.
  • The business should also have completed a feasibility study documenting the viability of the proposed start-up business.

Projects are also evaluated according to the following criteria:

  • The degree to which the facility will increase the utilization of agricultural commodities produced in the state.
  • New and innovative
  • Feasibility
  • The proportion of local match to be contributed to the project.
  • The level of need of the region where the existing facility is, or the proposed facility is to be located.
  • The degree to which the facility produces a co-product that is marketed in the same locality as the facility.

Any single project may apply for up to $900,000 in assistance. Financial assistance is provided in the form of loans and forgivable loans. Generally, assistance of $100,000 or less is provided as a forgivable loan, while larger awards are usually a combination of loans and forgivable loans, with the forgivable portion decreasing as the award size increases.

23.1 Other Assistance Programs Offered by the State of Iowa

There are a number of other programs administered by the State of Iowa that are designed to foster the growth and profitability of businesses in the state of Iowa and to create quality job opportunities for Iowans. For more information and/or confidential consultation, on any of the following programs, go to www.smart.state.ia.us or call 1-800-245-IOWA.

    • Community Economic Betterment Account (CEBA):

The CEBA program provides financial assistance to companies that create new employment opportunities and/or retain existing jobs, and make new capital investment in Iowa.

    • Economic Development Set-Aside Program (EDSA):

The EDSA program provides financial assistance to companies that create new employment opportunities and/or retain existing jobs, and make new capital investment in Iowa.

    • New Jobs and Income Program (NJIP):

The Iowa New Jobs and Income Program provides a package of tax credits and exemptions to businesses making a capital investment of at least $10.87 million and creating 50 or more jobs meeting wage and benefit targets.

    • Enterprise Zones:

Eligible businesses locating or expanding in an Enterprise Zone area may receive a package of tax credits and exemptions.

    • Entrepreneurial Ventures Assistance (EVA):

The Entrepreneurial Ventures Assistance (EVA) program provides financial and technical assistance to start-up and early-stage companies.

    • Targeted Small Business Financial Assistance Program (TSBFAP):

This program is designed to assist in the creation and expansion of businesses owned, operated and managed by women, minorities, or persons with a disability.

    • Self-Employment Loan Program (SELP):

This program is designed to assist in the creation and expansion of businesses owned, operated and managed by women, minorities, or persons with a disability.

    • Entrepreneurs With Disabilities (EWDI)

The EWDI program helps qualified individuals with disabilities establish, acquire, maintain or expand a small business by providing technical and financial assistance. To be eligible for the program, applicants must be active clients of the Iowa Department of Education Division of Vocational Rehabilitation Services or the Iowa Department for the Blind.

    • Infrastructure Financial Assistance Programs:

Financial assistance programs are available to finance rail, road and community infrastructure to attract new developme0nt or support growth of existing development.

    • Tax Increment Financing (TIF):

City councils or county boards of supervisors may use the property taxes resulting from the increase in taxable valuation due to construction/reconstruction of new industrial or commercial facilities to provide economic development incentives to a business or industry.

 

Chapter 24

What types of assistance does the USDA offer for new ag related businesses?

U. S. Department of Agriculture Rural Development

The USDA offers ag related business finance assistance through the Rural Business-Cooperative Service (RBS), Business Programs (BP). BP works in partnership with the private sector and the community-based organizations to provide financial assistance and business planning. BP helps fund projects that create or preserve quality jobs and/or promote a clean rural environment. The financial resources of RBS BP are often leveraged with those of other public and private credit source lenders to meet business and credit needs in under-served areas. Recipients of these programs may include individuals, corporations, partnerships, cooperatives, public bodies, nonprofit corporations, Indian tribes, and private companies.

1. Business and Industry Direct Loans

The Business and Industry (B&I) Direct Loan Program provides loans to public entities and private parties who cannot obtain credit from other sources. Loans to private parties can be made for improving, developing, or financing business and industry, creating jobs, and improving the economic and environmental climate in rural communities (including pollution abatement). This type of assistance is available in rural areas (this includes all areas other than cities or unincorporated areas of more than 50,000 people and their immediately adjacent urban or urbanizing areas).

Eligible applicants include any legally organized entity, including cooperatives, corporations, partnerships, trusts or other profit or nonprofit entities, Indian tribes or Federally recognized tribal groups, municipalities, counties, any other political subdivision of a State, or individuals. Loans are available to those who cannot obtain credit elsewhere and for public bodies.

The maximum aggregate B&I Direct Loan amount to any one borrower is $10 million.

24.2 Business and Industry Guaranteed Loans

The Business and Industry (B&I) Guaranteed Loan Program helps create jobs and stimulates rural economies by providing financial backing for rural businesses. This program provides guarantees up to 90 percent of a loan made by a commercial lender. Loan proceeds may be used for working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing. The primary purpose is to create and maintain employment and improve the economic climate in rural communities. This is achieved by expanding the lending capability of private lenders in rural areas, helping them make and service quality loans that provide lasting community benefits. This program represents a true private- public partnership.

B&I loan guarantees can be extended to loans made by recognized commercial lenders or other authorized lenders in rural areas (this includes all areas other than cities or unincorporated areas of more than 50,000 people and their immediately adjacent urban or urbanizing areas). Generally, recognized lenders include Federal or State chartered banks, credit unions, insurance companies, savings and loan associations, Farm Credit Banks or other Farm Credit System institutions with direct lending authority, a mortgage company that is part of a bank holding company, and the National Rural Utilities Finance Corporation. Other loan sources include eligible Rural Utilities Service electric and telecommunications borrowers and other lenders approved by RBS who have met the designated criteria.

Assistance under the B&I Guaranteed Loan Program is available to virtually any legally organized entity, including a cooperative, corporation, partnership, trust or other profit or nonprofit entity, Indian tribe or Federally recognized tribal group, municipality, county, or other political subdivision of a State.

The maximum aggregate B&I Guaranteed Loan(s) amount that can be offered to any one borrower under this program is $25 million.

24.3 Intermediary Relending Program

The purpose of the Intermediary Relending Program (IRP) is to finance business facilities and community development projects in rural areas. This is achieved through loans made by the Rural Business-Cooperative Service (RBS) to intermediaries. Intermediaries re-lend funds to ultimate recipients for business facilities or community development. Intermediaries establish revolving loan funds so collections from loans made to ultimate recipients in excess of necessary operating expenses and debt payments will be used for more loans to ultimate recipients.

Who May Borrow?
Intermediaries may be private non-profit corporations, public agencies, Indian groups, or cooperatives. Intermediaries must:

  1. Have legal authority to carry out the proposed loan purposes and to incur and repay the debt.
  2. Have a record of successfully assisting rural business and industry, normally including experience in making and servicing commercial loans.
  3. Provide adequate assurance of repayment.

Ultimate recipients may be private or public organizations or individuals.

At least 51 percent of the owners or members of both intermediaries and ultimate recipients must be United States citizens or admitted for permanent residency. Both intermediaries and ultimate recipients must be unable to obtain the proposed loan elsewhere at reasonable rates and terms.

How May Funds Be Used?
All of the IRP loan funds received by an intermediary must be reloaned to ultimate recipients. Interest income and fees may be used for administrative costs, technical assistance to borrowers, or debt retirement. All collections from the operation of the IRP revolving loan fund that are not used for the above authorized expenses must be made available for relending to eligible ultimate recipients.

Loans from intermediaries to ultimate recipients must be for the establishment of new businesses, the expansion of existing businesses, creation of employment opportunities, saving of existing jobs, or community development projects.

What are the Loan Terms?
Loans to intermediaries are scheduled for repayment over a period of up to 30 years. The term of loans from intermediaries to ultimate recipients is set by the intermediary.

What is the Interest Rate?
The interest rate on loans to intermediaries is 1 percent per annum. The interest rate charged to ultimate recipients is negotiated by the intermediary and the ultimate recipient.

Is Collateral Required?
Yes. All loans to intermediaries must be adequately secured. Security normally consists of a lien on the IRP revolving fund. Intermediaries are also required to obtain RBS approval for their security policies for loans to ultimate recipients.

If Ultimate Recipients Fail to Repay Loans from the Intermediary, what happens to the Intermediary's Loan from RBS?

When the intermediary accepts the IRP loan, it is incurring a debt. Collections from loans to ultimate recipients should be sufficient to repay the RBS loan on schedule. However, even if collections from ultimate recipients are not sufficient, the intermediary is fully responsible for repaying RBS.

Where Should Applications be Filed?
Complete applications should be sent to the USDA Rural Development State Office for the State where the applicant is located.

What Should Be Included in an Application?
Anyone interested in applying for an IRP loan should obtain a copy of the IRP regulations (FmHA Instruction 4274-D) from the RBS National Office or any USDA Rural Development State Office. The regulations contain detailed instructions for completing an application.

Where can Additional Material be Obtained?
Additional information, copies of the regulations, and forms may be obtained by contacting any USDA, Rural Development State Office (check your telephone directory under "Federal Government") or by writing to the RBS National Office at the following:

USDA, Rural Business-Cooperative Service
1400 Independence Avenue, SW
Room 5050 South Building
Washington DC 20250
Phone: (202) 720-1400

24.4 Rural Business Enterprise Grants

The Rural Business-Cooperative Service (RBS) makes grants under the Rural Business Enterprise Grants (RBEG) Program to public bodies, nonprofit corporations, and Federally-recognized Indian Tribal groups to finance and facilitate development of small and emerging private business enterprises located in areas outside the boundary of a city or unincorporated areas of 50,000 or more and its immediately adjacent urbanized or urbanizing area. Costs that may be paid from grant funds include the acquisition and development of land and the construction of buildings, plants, equipment, access streets and roads, parking areas, and utility and service extensions; refinancing; fees for professional services; technical assistance and related training for adults; startup operating costs and working capital, providing financial assistance to a third party; production of television programs to provide information to rural residents; and to create, expand, and operate rural distance learning networks. Grants may also be made to establish or fund revolving loan programs.

Who is Eligible?
Eligibility is limited to public bodies, private nonprofit corporations, and Federally-recognized Indian Tribal groups. Public bodies include incorporated towns and villages, boroughs, townships, counties, States, authorities, districts, Indian Tribes on Federal and State reservations, and other Federally-recognized Indian Tribal groups in rural areas. Small and emerging businesses with less than 50 new employees and less than $1 million in gross annual revenues are eligible for assistance.

How May Funds be Used?
Funds may be used to facilitate the development of small and emerging private business enterprises. Costs that may be paid from grant funds include the acquisition and development of land and the construction of buildings, plants, equipment, access streets and roads, parking areas, and utility and service extensions; refinancing; fees for professional services; technical assistance and adult training associated with technical assistance; startup operating costs and working capital, providing financial assistance to a third party; production of television programs to provide information to rural residents; and to create, expand, and operate rural distance learning networks.

Limitations:
Grants cannot be used for:

    1. Production of agricultural products through growing, cultivating, and harvesting either directly or through horizontally integrated livestock operations except for commercial nurseries or timber operations or limited agricultural production related to technical assistance.
    2. Comprehensive areawide planning.
    3. Loans by grantees when the rates, terms, and charges for those loans are not reasonable or would be for purposes not eligible under RBEG regulations.
    4. Development of a proposal that may result in the transfer of jobs or business activity from one area to another. This provision does not prohibit establishment of a new branch or subsidiary.
    5. Development of a proposal which may result in an increase of goods, materials, commodities, services, or facilities in an area when there is not sufficient demand.
    6. For programs operated by cable television systems.
    7. To fund part of a project which is dependent on other funding, unless there is a firm commitment of the other funding to ensure completion of the project.

All applications are considered without regard to race, color, religion, sex, national origin, age marital status, or physical or mental handicap (provided applications have the capacity to enter into a legal contract) of the members of the groups applying for assistance. Service must be extended on the same basis.

how are Applications Processed?
Applicants are required to submit supporting data before formal application is made. After determining the order of funding priorities, RBS will tentatively determine eligibility and request applicants to assemble and submit formal applications.

How are Grants Closed?
After determining that applicable administrative actions and the required work of the applicant have been completed, RBS will deliver the grant funds by Treasury check.

Where Should Applications be Filed?
Forms are available from and may be filed in any USDA Rural Development State Office, check your telephone directory under "Federal Government" or call the RBS National Office Specialty Lenders Division, (202) 720-1400.

Other Conditions
Applicants for grants to help develop private business enterprises must file written notice of intent with the State single point of contact consistent with Intergovernmental Review requirements. Federally-recognized Indian Tribes are exempt from this requirement.

Applicants for grants to establish a revolving loan program must include detail on the applicant's experience operating a revolving loan program, proposed projects, applicant's financial ability to administer a revolving fund, the need for a revolving fund, and other funds proposed to leverage funds made available under this program.

24.5 Rural Business Opportunity Grants

Rural Business Opportunity Grant funds provide for technical assistance, training, and planning activities that improve economic conditions in rural areas. Applicants must be located in rural areas (this includes all areas other than cities of more than 10,000 people). Nonprofit corporations and public bodies are eligible. A maximum of $1.5 million per grant is authorized by the legislation. RBS is designing the program to promote sustainable economic development in rural communities with exceptional needs.

24.6 Rural Economic Development Loans

Purpose

Provides zero interest loans and grants to Rural Utilities Service (RUS) financed telephone and electric utilities to promote rural economic development and job creation projects. Reference: Section 313 of the RE Act 7 CFR 1703, Subpart B.

Applicant Eligibility

Zero interest loans may be made, at the discretion of the Rural Business-Cooperative Service (RBS) Administrator, to any RUS borrower that is not delinquent on any Federal debt or in bankruptcy proceeding.

Loan Purposes
To promote rural economic development and/or job creation projects including but not limited to:

  • Project feasibility studies
  • Start-up costs
  • Incubator projects
  • Other reasonable expenses

Ineligible Purposes

  • Any project in which any director, officer, manager, stockholder, or relative thereof, who has a significant ownership interest, or who would, in the judgment of the RBS Administrator, present a potential for or appearance of a conflict of interest.
  • Costs incurred prior to receipt of the completed application without prior written approval.
  • Projects located in areas covered by the Coastal Barrier Resources Act or projects which would adversely impact the environment.
  • For the purchase or lease of any real property, materials, equipment, or services from the borrower or significant stockholders, officers, managers, or close relatives thereof, without the RBS Administrator's prior written approval.
  • To refinance any debt incurred prior to receipt of the completed application.
  • For any electric or telephone purpose.
  • For the borrower's electric or telephone operation.
  • Any operations affiliated with the borrower without prior written approval.
  • To pay the salaries of any employee or owner of the borrower or its affiliates.
  • Community antenna television systems or facilities unless in conjunction with educational or medical entities and projects.

Maximum and Minimum Sizes

Maximum size of loan: 3 percent of projected total funds available under Section 313 of the Act, during that fiscal year, rounded to the nearest $10,000.

  • Maximum loan size in Fiscal Year 1998: $750,000
  • Minimum loan size: $10,000

Supplemental Funding Requirement

A project will not be selected unless supplemental funding is provided in an amount equaling at least 20 percent of the amount of the zero-interest loan funds provided by RBS.
Supplemental funding may be provided by the project owner in the form of equity funds, private sources, State and local goernment sources, other Federal Government sources, or the RUS borrower.

Terms of zero-interest loan repayment
The signed promissory note covering the repayment of the zero-interest loans between RBS and the RUS borrower establishing when repayments begin.

  • Repayment terms on a loan to the RUS borrower are based on the nature of the project. Ordinarily, the term, including any principal deferment period, will not exceed 10 years.
  • Repayment by the recipient must equal the terms to the RUS borrower, unless approved by the RBS Administrator.
  • Principal repayments may be deferred for a period up to 2 years by RBS. Ordinarily, the deferment for an established business will be limited to 1 year.

Policy

  • Promote projects that will result in a sustainable increase in the productivity of economic resources in rural areas and thereby lead to a higher level of income for rural citizens.
  • RUS borrowers promote economic development in rural areas and job creation projects that are based on sound economic and financial analysis and take a long-term perspective.
  • Encourage economic development in rural areas and job creation projects without regard to service area.
  • To promote financially-viable projects.
  • To encourage RUS borrowers to deposit funds in Cushion-of-Credit Accounts.

Application Filing Procedures

Applications may be filed on any official workday at any Rural Development State Office. With the exception of applications to fund feasibility studies, a simultaneous filing must also be sent to the State single point of contact for State and local governments.

An "Application" must consist of:

  • Standard Form 424: "Application for Federal Assistance".
  • Board Resolution (Refer to 7 CFR 1703.34 (2)).
  • Miscellaneous Federal forms and certifications.
  • Narrative discussion of the following:

    • "Selection Factors" as set forth in 1703.35
    • "Project Description" as set forth in 1703.36
    • Except for applications for feasibility studies, a
      discussion regarding the "environment impact of the
      proposed project."

Application Review
The following factors will be considered in the selection process:
• Nature of the project.
• Job creation projections.
• Long-term improvements in economic development.
• Diversifying the rural economy or alleviating under-employment.
• Supplemental funds.
• Economic conditions and job creation.
• Unemployment rates.
• Per capita personal income.
• Change in population.
• Number of long-term jobs.
• Community-based economic development program.
• Plan for improving the marketable skills of people in rural areas.
• Location (rural).
• Support for the program funds deposited in the cushion-of-credit account.
• Demonstration project.
• Probability of success.
• Special economic status.

Other Considerations:
• Environment requirements.
• Equal opportunity and nondiscrimination.
• Architectural Barriers Act of 1968.
• Flood hazard area precautions.
• Real property acquisition and relocation.
• Debarment and Suspension.
• Drug-free workplace (grant only).
• Restrictions on Lobbying.

Sources of Funding
Funds for zero-interest loans are derived from annual appropriations from Congress.

Available for Loans in Fiscal Year 1997:
Approximately $12.341 million

Program Administration
The program is administered at the State level by Rural Development State Offices. To obtain the addresses and telephone numbers of State Offices visit the Rural Development Field Office website. For further information on this program, please call either the State Office servicing your State or:

Rural Business-Cooperative Service
Specialty Lenders Division
(202) 720-1400

24.7 Rural Economic Development Grants

Purpose

Provides grants from the Rural Business-Cooperative Service (RBS) to rural communities through Rural Utilities Service (RUS) borrowers to be used for revolving loan funds for community facilities and infrastructure and for assistance in conjunction with rural economic development loans.

Applicant Eligibility

Funds may be granted to any electric or telephone RUS borrower that is not financially distressed, delinquent on any Federal debt, or in bankruptcy proceedings.

Uses of Grant Funds

  • To establish a revolving loan fund.
  • For project feasibility studies/technical assistance
  • For community development assistance (non-profit and public bodies)
  • For projects to public for-profit or non-profit entities to provide education and training to rural residents to facilitate economic development
  • For projects to public for-profit or non-profit entities to provide medical care to rural residents.

Revolving loan funds:

Grant funds for the purpose of establishing revolving loan funds will be provided only to RUS borrowers on a non pass-through basis. RUS borrowers will, in turn, provide zero-interest loans to foster rural economic development.

Administration of Revolving Loan Funds

Initial loan funds may be used for:

• Business incubators by non-profit groups
• Community development
• Facilities and equipment for education
• Facilities and equipment for medical care

• Loans made from repayment of the initial loans made by RUS borrowers may be used for any rural economic development purpose in accordance with a prior agreement between the borrower and RBS.

• The borrower will provide a Board Resolution certifying a commitment to provide and maintain additional funding to the revolving loan fund in an amount no less than 20 percent of the RBS grant approved.

• The borrower must supply RBS a proposed budget demonstrating that no more than 10 percent of grant funds received are used to cover operating expenses of the revolving loan fund.

• The funds must be lent to the project within 3 years of the date of the grant approval by RBS.

• RBS requires that the revolving loan program be administered in accordance with a rural development plan developed by the borrower and approved by RBS.

Borrowers applying for grant funds must submit a Scope of Work to RBS.

Rural Development Plan
RBS requires that the revolving loan program be administered in accordance with a rural development plan developed by the borrower and approved by RBS. The plan must outline the following:

• Specific objectives for the revolving loan fund program, lending parameters, and the maximum and minimum loan.

• Documentation of borrower's coordination of lending activities with other local entities that provide financing for rural economic development.

• Eligibility criteria if other than outlined in this section.

• The application process and method of disposition of the funds to the project owner.

• A procedure for monitoring the project owner's accomplishments and reporting requirements by the project owner's management.

The Scope of Work
Borrowers applying for grant funding must submit a Scope of Work to RBS. The Scope of Work must contain the following:
• Documented need for grant funds.
• Documented authority and ability of the borrower to administer the revolving loan fund.
• Documented ability to commit financial resources under the control of the borrower to assist in the establishment of a rural development program.
• Documentation that the borrower has secured commitments of significant financial support for supplemental support.
• A list of proposed fees and other charges.
• Borrowers policy for non-Federal funds.

Application Filing Procedures
Applications may be filed on any official workday at any Rural Development State Office. With the exception of applications to fund feasibility studies, a simultaneous filing must also be sent to the State single point of contact for State and local governments.

An "Application" must consist of:

  • Standard Form 424: "Application for Federal Assistance".
  • Board Resolution (Refer to 7 CFR 1703.34 (2)).
  • Miscellaneous Federal forms and certifications.
  • Narrative discussion of the following:
    -"Selection Factors" as set forth in 1703.35
    -"Project Description" as set forth in 1703.36
    - Except for applications for feasibility studies,
    discussion regarding the "environment impact of the
    proposed project."
  • Rural Development Plan/Scope of Work

Application Submission and Review
The following factors will be considered in the selection process:
• Nature of the project.
• Job creation projections.
• Long-term improvements in economic development.
• Diversifying the rural economy or alleviating under-employment.
• Supplemental funds.
• Economic conditions and job creation.
• Unemployment rates.
• Per capita personal income.
• Change in population.
• Number of long-term jobs.
• Community-based economic development program.
• Plan for improving the marketable skills of people in rural areas.
• Location (rural).
• Support for the program funds deposited in the Cushion-of-Credit account.
• Demonstration project.
• Probability of success.

Sources of Funds
All funds for grants available under this program are provided by interest differential credits to the Rural Economic Development Subaccount.

Maximum and Minimum
Maximum size of grant: 3 percent of projected total funds available under Section 313 of the Act, during that fiscal year, rounded to nearest $10,000.

• Current maximum is $330,000.
• Current minimum is $10,000.

Program Administration
The program is administered at the State level by Rural Development State Offices. Addresses and telephone numbers of State Offices can be obtained by calling the RBS National Office at (202) 720-0813. For further information on this program, please call either the State Office servicing your State or:
Speciality Lenders Division
Rural Business-Cooperative Service
(202) 720-1400

 

Chapter 25

What are the opportunities for local funding?

Actually, checking for local funding is probably the best place to start. Many rural development groups have established modest revolving loan funds or small grant programs to encourage local businesses. Local lenders are frequently very aggressive in helping with business start-ups within their lending territories. Also, some level of local participation is frequently a requirement for state and federal grant and guaranteed lending programs. Your local developer is an excellent contact.

 

Chapter 26

Are there other sources of funding for small business startups?

A thorough search for funding will turn up a number of alternative sources of funding. It is virtually impossible to create an all-encompassing list that addresses every business opportunity.

As you look for funding, keep in mind those people or businesses that would stand to gain from your new venture. For instance, utility companies frequently offer varying levels of financial assistance, and it is not uncommon for providers of equipment and supplies to participate in some type of creative start-up assistance. Allowing employees to take part-ownership can be the route to new lines of cash and credit for the business.

Another new reference source that you will want to be sure and check our it is the National Small Business Financial Assistance (SBFA) Work Group, which was created to respond to the need of small businesses for financial assistance from the government, which has started a web page. The Work Group proposes a "cafeteria plan" of financial assistance for small businesses. That is, agencies and business owners will have the opportunity to examine various financial assistance programs from around the country, and select those concepts that best fit the needs of their jurisdictions. This web page will provide access to ideas provided by the members of the Work Group. Also, check out the the small business environmental assistance site visit manual (funded by an EPA grant to the Iowa Waste Reduction Center) at http://www.smallbiz-enviroweb.org/state.html

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