By William Reisner

      Small manufacturers in Kansas City and across the country are now competing in a global marketplace that demands lower prices. Manufacturers must find ways to increase production capabilities to meet the demands of the shifting marketplace. To accomplish these goals, manufacturers often modernize their plants, adding capacity, efficiency, product improvement and other benefits from new machinery.

      Fortunately for the growing set of expanding manufacturers confronting the challenges of a changing marketplace, recent changes to tax-exempt industrial development bond (IDB) legislation provide a more flexible and effective financing solution.

Meet Market Demands
      Meeting the demands of the marketplace by modernizing a plant and purchasing new, more efficient equipment is an expensive endeavor for a small business. Steadfast reliance on a bank for traditional term debt allows the lender to dictate the size of a project and the terms and conditions of the financing, including the length of the repayment schedule, interest rate and certain debt covenants.

      Small businesses need to have as much information and as many options as possible when making a significant capital investment. While business owners strive to fully understand their equipment options, facility capabilities and sources of capital, they may be unaware of some potential sources of capital. One source that manufacturers often overlook is the use of tax-exempt IDBs.

What Exactly is an IDB?
      IDBs offer an incentive for manufacturers to add new jobs and local investment by providing tax-exempt financing for small businesses, which can lower the annual interest cost for the company by as much as three percent per year.

      An industrial development authority or other designated government body has the authority to issue tax-exempt revenue bonds that are repaid by the private company. The authority or government body receives an annual allocation of private activity bond cap from its state. The authority awards bond allocation primarily in consideration of the project’s local economic benefits, such as the number of jobs created or the impact of the capital investment in the community.

      IDBs help promote capital investment at low interest rates, creating benefits for both the manufacturer and local economy.

      A commercial bank is still involved in the financing of the project. IDBs require credit enhancement to be sold in the capital markets. This enhancement may include a direct-pay letter of credit supplied by the commercial bank, allowing the bonds to trade on the strength of the letter-of-credit provider rather than relying solely on the credit of the borrower. More importantly, the company is able to fund the project with tax-exempt interest rates while maintaining minimal disclosure of proprietary information.

The Process of Funding an IDB
      Early involvement of an investment banker and legal counsel can help address the complex issues related to IDBs.

      If an IDB makes sense, based on a review by the investment banker and counsel, the next step is to apply for tax-exempt allocation from the appropriate state or local government issuing authority. There are certain limitations imposed by the Internal Revenue Code, and an investment banker must have the expertise to advise the company on these restrictions during the project evaluation phase.

      Once the allocation is awarded and the project induced, it is the financing team’s responsibility to document the bond issue for resale to the capital markets while keeping the company apprised of the anticipated funding date.

William Reisner is vice president of Stern Brothers & Co. You can reach him at (314) 743-4017 or .