Inc.'s Guide to 'Smart' Government Money
How small companies are profiting from new economic-development programs
In the past 10 years, state and local governments all over the United States have created hundreds of programs to help small growing companies. Most entrepreneurs don't yet know about these programs -- but a few are finding out and are getting a leg up on their competitors in the process. If you know where to look, you may be able to find low-cost capital, technical assistance, even help in opening up international markets. -- M. E. M.
Q: What's the definition of a contradiction in terms?
A: "I'm from the government, and I'm here to help you."* * *
Most people who run their own companies might not laugh at the joke -- too true to be funny, and all that. Then again, most people who run their own companies haven't met Sandra Suran.
Suran is a government bureaucrat -- sort of. Until the spring of 1988 she was a highly successful business professional, a partner in the Portland, Ore., office of Big Eight accounting firm KPMG Peat Marwick. But she was worried about her state's economy. Oregon's future, Suran believed, depended on smaller companies; after all, companies with fewer than 100 people employed some 70% of the state's work force. But she also knew that Oregon's businesses had an above-average failure rate. What, she wondered, could the state do to improve that?
To find out, Suran resigned from her job and became the state's first small-business advocate. For a start, she raised more than $200,000 in cash and services from Oregon corporations to study the small-business economy and what it needed from state government. Next she surveyed close to 400 small Oregon companies and conducted some 300 meetings and focus groups of entrepreneurs. She also researched the government programs designed to assist them. What she learned surprised her.
Oregon, it turned out, didn't need more programs to help growing companies. Among federal, state, and local governments, there were hundreds of useful programs available. One program would bring efficiency experts to rural companies at no charge. Another would help pay for turnaround consultants at troubled companies. But few people knew about these or any of the others. "There are huge amounts of resources available," Suran says. "The problem is that any one person can hold only a few of those in their head at any one time." Small companies had enough trouble keeping track of the regulations they had to obey, never mind keeping track of how governments could help them. In her focus groups, she remembers, the constant refrain was, If you don't do anything else, simplify government.
Like the chief executive officers Suran interviewed, most entrepreneurs see government as baffling, frustrating, and hostile. There's evidence aplenty for that view. But it misses what Suran discovered -- all the government-assistance programs small companies can use. Those programs aren't unique to Oregon; on the contrary, they have been proliferating in many parts of the country. They represent something of a quiet revolution in the way public officials think about developing their economies. While no one was looking, state and local governments in the 1980s discovered the importance of growing companies.
Just look at the numbers. According to the Washington, D.C.-based Corporation for Enterprise Development, all but 4 states now provide some type of small-company financing; 28 offer publicly funded venture or seed capital. Twenty-five states fund new-business incubators designed to help start-ups through the difficult early stages. Forty-six have Small Business Development Centers to provide management assistance. Thirty award grants for state-of-the-art research and development. Indeed, the Small Business Administration's newest edition of The States and Small Business contains more than 400 pages of program listings (see "Where to Go from Here," page 7). And that doesn't even count programs at the local level -- where, Robert Davenport of the National Development Council says, growth has been just as dramatic.
A decade ago none of this was true. Then, only a few states even had small-business offices. Economic development mostly meant persuading big companies to locate (or keep) their facilities in your district rather than someone else's. Such smokestack chasing is still common, of course: the political payoff for landing a big plant is too alluring for most elected officials to resist. But many states and localities are realizing that helping small, indigenous companies grow is a wiser use of public resources.
Part of this change can be traced to the popularity of economist David Birch, who was the first to stress the importance of growing companies in job creation. And part stems from policymakers' experience in the early 1980s, watching large corporations lay off thousands of workers at a time. Perhaps it's not surprising that two early leaders in entrepreneurship promotion were the governors of Pennsylvania and Michigan, whose economies were suffering from the problems of Big Steel and Big Auto. If a state couldn't count on its major employers, what else could it do but help small companies? Then too, maybe it has dawned on public officials that smokestack chasing is a zero-sum game. "Fifteen years ago economic development meant, Let's attract a big company," Davenport says. "It was a lot of money spent, and there weren't a lot of positive payoffs for the nation as a whole. Now, communities are saying, We'll grow our own garden."
Such sentiments aside, what do government officials know about helping growing companies? Often, not much. As Suran found, all that those companies really ask from government is fewer hassles. So why don't bureaucrats just skip the direct assistance and do small companies a favor by making their lives simpler?
Not in this century. For better or worse, politicians have built-in incentives to add new programs, not to improve or abolish old ones. Simplifying a regulation or streamlining a procedure seldom gets a politician any publicity or power; starting a new multimillion-dollar loan program does. On the bright side, some of those new loan programs -- or the hundreds of other programs around -- are helpful. Some are run by smart people who understand entrepreneurial businesses -- and some can give your company a real competitive advantage. If you don't believe that's possible, read the stories that follow.
In Oregon, Sandra Suran thinks she can make it easier for CEOs to learn what the state has to offer -- she wants to implement a computerized information system to help small-business owners find what they need. In the meantime, unfortunately, there's no easy way to find the most useful programs. Government agencies typically have little incentive to coordinate their public-information efforts or to eliminate ineffective programs. And public officials rarely know everything that's available, or which program might be effective for any given company. Without such comprehensive information, is it really worth the bother of checking out government programs?
Ask Scott Wauben. Wauben is president of Long Beach Valve & Fitting Co., a $6-million distributor of industrial fittings. He's also a self-described "doubting Thomas" and "no fan of government bureaucrats" -- until he discovered the California Export Finance Office (see "Export Promotion: Two Steps Forward, One Step Back," page 6). Without CEFO's financial assistance, Wauben would have had to stop making large sales to South Korea, a major market, when Korea imposed new currency restrictions on imports about two years ago. Wauben can't say he'd like to see CEFO replicated elsewhere, however. "My competitors face the same hidden trade barriers I do," he says cheerfully. "Hopefully, they're in states that aren't as receptive."
Hopefully for Wauben. But what if he -- or someone like him -- is your competitor?
FINANCING RESEARCH: SURPRISE! A FEDERAL PROGRAM THAT WORKS
If you have the idea, SBIR may have the money
"Money down the sewer." That's what Ronald Reagan's science adviser originally thought of a program called Small Business Innovation Research (SBIR). And he wasn't alone: before SBIR was enacted in 1982, all of the federal agencies involved opposed it.
Here's why. Under SBIR, the 11 largest federal agencies sponsoring research must set aside 1.25% of their external-research budgets for companies with 500 or fewer employees. Since the agencies include such big spenders as the Department of Defense, the money involved is substantial: in 1988 that tiny percentage came to about $400 million. SBIR proponents thought the set-aside would help small technology companies break into the federal research establishment. Opponents thought they didn't deserve to be included.
The opponents were wrong. SBIR participants have done so well that even Reagan's adviser changed his mind and later testified in favor of extending the program. And the federal agencies? Last year their project officers told the U.S. General Accounting Office that on average SBIR projects were of higher quality than those performed by traditional government contractors such as large corporations or universities. SBIR researchers were judged more creative, more skilled, more likely to use appropriate research methods, and more effective in project management. And the projects were more likely to lead to invention and commercialization of new products.
Granted, the program is too young to have much of a track record. Most SBIR recipients haven't yet gone from R&D to marketable products or services. Even so, preliminary studies suggest that prospects for commercialization are better than predicted. While the SBA once anticipated that about 6% to 8% of the projects would lead to successful commercial sales, it now estimates the proportion at 20% to 25%.
All this success hasn't gone unnoticed. Consultants offer SBIR-proposal assistance; there's an SBIR newsletter; there's even an SBIR specialist at one of the Big Eight accounting firms. More than a dozen states have begun offering application assistance, while several provide additional funding to award-winners. And those winners often find that the awards help interest venture capitalists or big corporations. "It's a tremendous way to get recognition and credibility," says Jan Zimmerman, cofounder of Emerson & Stern Associates Inc., a 15-person speech-and-language software development company in San Diego. She thinks the firm's 17 SBIR awards have made it easier to find corporate partners.
Other SBIR participants are equally effusive. Take Arent Kits van Heyningen, CEO of KVH Industries Inc., a $6-million Middletown, R.I., manufacturer of navigational equipment, which appeared on INC.'s 1988 list of the nation's fastest-growing private companies. "This is probably the best thing that ever happened" in the federal government, says Kits van Heyningen, who has funded about 20% of his company's R&D through three SBIR awards. "I personally think the program is unbelievably effective." SBIR even has some reluctant converts, such as Del Bloem, of ICS Medical Corp., in Schaumburg, Ill. "The government really ought not to be judging what research projects should be funded," says Bloem, who used SBIR grants to develop a new generation of his $2-million company's inner-ear-testing devices. "But with all that said, I may go back and try to get some more of that money. . . . I really have to say that the government was remarkably helpful and patient."
What SBIR offers these CEOs is hard to find in the private sector: seed money for high-risk, high-payoff early-stage R&D. A grant allows executives to worry less about the products paying today's bills and more about tomorrow's big hit. "The SBIR lets you bypass the chicken and go directly to get the egg," explains David Colvin, president of Triangle Research & Development Corp., in Raleigh, N.C., a 30-time winner.
Here's how the process works. Each year the 11 agencies involved send out solicitations in a wide variety of areas. The topics are broad enough that most research-oriented companies can find a suitable category, whether it's software for dyslexic children or new lasers for surgeons. These solicitations are for Phase I grants -- feasibility research -- which run for six months, for up to a maximum of $50,000. If the feasibility study looks promising, companies can then apply for Phase II grants or contracts, getting up to $500,000 over two years. After that, a company must rely on private-sector funding or a regular government contract for commercialization.
Like any program, SBIR has its glitches. One frequent complaint concerns the six-month gap between the end of Phase I and the award of Phase II funds. That hiatus can have a murderous effect on the cash flow of very small companies. Another potential problem: adjusting to government accounting requirements. Triangle's Colvin, for one, remembers spending about half of his time during Phase I installing an accounting system satisfactory to the Department of Defense.
But by far the most daunting feature of SBIR is the odds. Less than 15% of the program's applicants win Phase I awards, and only about 40% of those go on to win in Phase II. Many of the rejected proposals are high in quality -- and cost several thousand dollars to prepare. "We're getting about twice as many proposals recommended for awards as we have funding," laments Roland Tibbetts, SBIR program manager for the National Science Foundation. The problem, he says, will only get worse: SBIR funding is growing slowly, while the number of proposals most agencies receive is increasing at a 20% annual clip.
Such statistics have some small-business advocates arguing that the program should be expanded from 1.25% to 3% of federal external-research budgets. Until that unlikely event happens, prospective first-time applicants can take comfort in the fact that about 45% of Phase I awards go to companies that have never won before, with more than half going to companies with fewer than 30 employees. One reason: as companies get larger and more prosperous, they have more financing options, many less chancy than SBIR. "It is not an attractive investment for a company that has a lot of choices," acknowledges Milt Stewart, president of the Small Business High Technology Institute, in Phoenix.
A company can also improve its odds through simple strategies. If you don't have credentials in a given field, for example, hook up with someone who does -- particularly if you're applying to a highly academic agency such as NSF. That's the method Armando Cuervo, president of Sweet Dreems Inc., in Worthington, Ohio, used to get SBIR funding for his anticolic device. An international oil trader, Cuervo had no expertise in pediatrics. But as the father of a colicky baby who would fall asleep only in the car, he figured he could sell a medical device that attaches to a crib and simulates a moving car's sound and vibrations. So Cuervo interested some medical-school professors from Ohio State University in his idea; they joined the venture in exchange for consulting work once he was awarded the grant. Later Cuervo won a Phase II grant -- and now reports sales of more than 10,000 SleepTight Infant Soothers at $69.95 each.
Sometimes participants go away satisfied even when they don't win that Phase II grant. Ed Pillar, CEO of HiTech Inc., a $2-million manufacturer of fans and blowers in Zion, Ill., had that experience. HiTech won a Phase I grant from Defense in 1988 to study improved blower efficiency, but the project never got Phase II funding. Pillar still thinks it was one of the best things that ever happened to his 14-year-old company.
Why? Doing the SBIR project forced Pillar to take time out from the day-to-day operation of his 20-employee business to think long term. What he learned in his research was that German manufacturers were working on an efficiency breakthrough that could wipe out HiTech and its U.S. competitors. "It's given us the opportunity to do some in-depth market research from an engineering point of view," he says. "We've found that if someone in the States doesn't move forward in the next five years, our fan and blower industry will move to Germany just as our VCR industry moved to Japan." That discovery substantially changed Pillar's strategy: he now plans to invest as much as he can in R&D, hoping to outmaneuver his overseas competition.
No one would recommend that companies apply for SBIR grants to do market research. But Pillar's story suggests there's more going on in SBIR than even the statistics show. From the program's point of view, Ed Pillar's project is a dead end. But if this story is a failure -- if this is the "money down the sewer" -- no wonder SBIR is a success.
FINANCING GROWTH: LOW-COST LOANS
In Ohio and elsewhere the state pays the difference
There may not be many things an entrepreneur, a banker, and a politician will agree on, but Ohio's linked-deposit program is one. Just look at R. Samantha Grubb, Karen Drake, and Mary Ellen Withrow.
Grubb, the entrepreneur, is owner of Gayhart & Associates Inc., an executive-search firm in Cleveland. When she wanted to expand by buying and renovating a building in a trendy section of the city, her banker suggested a linked-deposit loan. Under the program, the state makes a two-year, loan-sized deposit at an interest rate three percentage points below market yields, and the bank passes the reduction along to the small-company borrower. The savings for Grubb: $12,000 in interest costs over two years.
Then there's banker Karen Drake, Grubb's loan officer at Cleveland's Ameritrust Co. For Drake, the linked-deposit program is a marketing tool that keeps clients happy by saving them money. Better yet, the cost to Ameritrust is minimal, and the bank doesn't drown in paperwork.
That leaves Mary Ellen Withrow, the politician, who is no doubt the program's biggest promoter. It was her idea -- and it helped win her two four-year terms as Ohio's state treasurer. When Withrow first ran, in 1982, the prime rate was well into double digits, and interest costs were often a severe burden on smaller companies. That gave her the idea for the linked-deposit program. Any Ohio company with fewer than 150 employees would be eligible, she proposed, so long as it created one job for every $15,000 to $25,000 loaned.
Today the program is a politician's dream -- which is one reason it's being emulated elsewhere. Known in Ohio as the Withrow Plan, the linked-deposit program gives the state treasurer name recognition and tremendous goodwill in the small-business community. But because the state is forgoing interest income rather than spending money directly, the expenditure never shows up in a budget -- or in budget-cutting debates. Then, too, Withrow needn't worry about judging business plans; she lets the banks do that. As a result, her program is simple and popular; since late 1983 more than 1,300 businesses have used it. Meanwhile, at least nine other state treasurers have started similar programs. (Some, however, target only specific types of companies, such as manufacturers.)
A perfect economic-development scheme? For qualifying companies, linked deposits have only pluses; they provide savings well worth the effort required to fill out the simple forms. But taxpayers may view the matter differently. For one thing, it's hard to tell how many jobs are created by the interest-rate subsidy. While the lower rate may make some marginal loans bankable, loan officers probably use the program most often to sweeten deals they would have made anyway.
As you might guess, Grubb isn't lying awake nights worrying about the theoretical shortcomings of the Withrow Plan. She estimates that she spent about 25 minutes filling out a form that saved her $12,000. And as returns on investment go, that's not bad.
MONEY FOR JOBS
If you're creating jobs, states and localities may have ready sources of funding
Capital in return for new jobs: that's by far the most common deal state and local government programs make with growing companies. So numerous and so diverse are the variations on the dollars-for-job-creation theme that we can't list them all. One approach that is particularly easy to use -- Ohio's linked-deposits program -- is described in "Financing Growth: Low-Cost Loans" (above). As for the rest -- well, take a look at how two company owners assembled packages of government-supported financing to expand their businesses. Naturally, the specifics differ. But there's a common theme: government capital is available to businesspeople who have a convincing plan and the patience to search out funding.
Larry Hatfield, 50, Durant, Okla.; president, Durant Molding & Manufacturing Inc. and Custom Molded Plastics Inc.
In 1987, a major customer asked Hatfield to expand his plastic-molding business by 10 machines. The customer agreed to supply the raw materials and buy the finished product. Because of loan covenants in his existing business, Hatfield decided to form a new corporation, Custom Molded Plastics, to undertake the expansion.
Custom Molded Plastics needed $4.6 million for a building, equipment, and working capital. Hatfield had only $320,000 and no way to get the rest from banks or investors.
Cincinnati Milacron Marketing Co. $1,045,000
Bank mortgage on building 400,000
U.S. Small Business Administration, 504 475,000Program loan
Finance-company equipment loan, 650,000504 Program
Oklahoma Industrial Finance Authority loan 1,000,000
Community Development Block Grant 500,000(loan through city of Durant)
Ozarks Corp. for Innovation Development 200,000Revolving Loan Fund
Owner's equity injection 320,000
Putting It All Together:
Hatfield's equipment supplier, Cincinnati Milacron Marketing Co., agreed to finance the first four machines if he could raise the rest of the money. Hatfield turned to Rural Enterprises Inc., a nonprofit organization in Durant.
Rural Enterprises is one of about 450 Certified Development Corporations (CDCs) authorized by the SBA as part of its fixed-asset lending program, called 504. Under 504, CDCs can take on promising asset deals that aren't quite bankable. Generally, an entrepreneur starts by finding a bank to take 50% of the deal for a first lien. Then the government sells long-term, guaranteed debentures for 40% and a second lien. The entrepreneur has to come up with the remaining 10% of the purchase price.
Some CDCs -- Rural Enterprises among them -- do more than just package 504 loans. The organization helped Hatfield find and apply to other funding sources as well. It also handled the paperwork for the loan package, which eventually reached 350 pages. All told, getting the money took about six months, as well as a $7,500 fee to Rural Enterprises.
Hatfield and Rural Enterprises began with local banks, convincing two of them to share a $400,000 mortgage on the building. But the Oklahoma banks didn't want any more exposure on one project and wouldn't participate in the SBA 504 loan for equipment. So Hatfield turned to an out-of-state finance company for the required 50% of the equipment financing.
He also sought a loan from the Oklahoma Industrial Finance Authority, a state agency charged with providing loans to new and expanding companies in Oklahoma. It looked good -- but the process took much longer than expected. Finally the company got the money, only hours before sending off its application for a federal grant known as an Urban Development Action Grant. In the excitement the company forgot to submit one form, and its UDAG application was disqualified.
For a while, the UDAG fiasco threatened to kill the whole project. But Custom Molded Plastics managed to secure a loan from a local revolving fund administered by Rural Enterprises; then it won funding from Oklahoma's allocations under the federal government's Community Development Block Grant (CDBG) program. To qualify for a loan using CDBG funds, Custom Molded Plastics had to meet certain job-creation requirements and hire 51% of its workers from families of low to moderate income. That condition didn't prove difficult in rural Durant. The company's announcement of 100 job openings attracted 1,000 applicants -- including plenty who met the income guidelines.
Custom Molded Plastics currently has about 150 employees and reports about $15 million in sales. When his major customer postponed an order last fall, Hatfield had to work out a deferment arrangement with three of the public creditors because his debt service is so high (more than $75,000 a month). Now, however, he's making payments again and in June retired his short-term loan from the revolving fund.
On Working with Government Funding Sources:
"It's like what women say about giving birth: shortly afterward, I swore I wouldn't do it again, but with time the experience mellows in your mind. You've really got to believe in the project you've got, because it's going to be tough. Government officials just take their own sweet time, and the timetables that industry has to deal with just don't mean anything to them."
William Rose Jr., 28, Ames, Iowa; president, It Works Inc., d/b/a Bagel Works Bakery.
Bagel Works Bakery, founded by Rose in 1985, was thriving at its single location, and customers told Rose they'd like to be able to buy his fresh bagels and cream cheese in grocery stores. Rose liked the idea; he figured his only competition in Iowa was from frozen bagels. But as he expanded his distribution to local stores in 1986, Rose found it more and more difficult to make enough bagels and process enough cream cheese in the bakery. Finally he signed a contract with Beatrice Cheese Inc. to manufacture his cream cheese -- but he still needed a freestanding bagel factory.
Banks said Rose needed to raise more equity capital, but Rose was unwilling to cede majority control to investors. "Everyone wanted 51% of the company, and I didn't want to give that up."
Training grant from state of Iowa $75,000
Bank loan, 90% SBA guaranteed 437,000
Bank loan, 90% guaranteed by Golden Circle 80,000Loan Guarantee Fund, a Chamber of Commerce-relatedgroup
Forgivable loan from Iowa Lottery funds 96,000
Ames Economic Development Commission loan, with deferred interest and principal 5,000for three years
City of Ames tax abatement and electric- 26,000power installation
Putting It All Together:
Even for an SBA-guaranteed loan, Rose needed more capital, so he set out to get it from other government programs. Why there? Well, he had already used an SBA loan back in 1984 to start two record stores called Music Works, which he sold when Bagel Works started to take off. At Bagel Works he read about a company that won Iowa training funds based on job creation and property improvement. So he called the training-grant program, and through it he discovered others. Assembling his financing package took nine months.
Rose got most of his help from local sources. The Ames Economic Development Commission loan, for example, was funded by the local gas company, for which Bagel Works will be a major customer. The toughest part of the process was applying for lottery funds. Iowa, like several other states, uses its lottery proceeds for small-business finance. But it awards the funds on a competitive basis to cities, which must provide support to the businesses as well as apply on their behalf. Bagel Works was initially rejected for insufficient local funding; Rose reapplied successfully. Though technically a loan, the debt will be forgiven as long as Bagel Works meets its job-creation projections.
Too soon to tell. Rose is predicting that Bagel Works's 1989 sales will be $3 million, up from $500,000 in 1988. At press time, factory ground breaking was scheduled for July.
On Working with Government Funding Sources:
"I'd do it again. All those incentives are there for the asking. The city was on my shoulder working to get the state funding. With the state, it's a process, and it's not one you hold your breath on."
EXPORT PROMOTION: TWO STEPS FORWARD,ONE STEP BACK
Some state programs help small companies do business overseas. Others? Well . . .
States and cities don't have much experience in promoting export business yet, so it's probably no surprise that their record is mixed. Still, they're devoting plenty of resources to the field and have begun coming up with some promising programs.
On the plus side: state governments spent $62 million on their trade departments last year, up nearly 200% from 1984. At least 27 states have passed laws authorizing export-financing programs much like the California Export Finance Office (CEFO). Several states and cities have recently begun helping small exporters package applications to the federal guarantee program of the Export-Import Bank of the United States. Two cities, Los Angeles and Tucson, have even begun direct lending to exporters with Ex-Im Bank guarantees. Mundane but valuable programs such as how-to-export seminars are common as well.
The minuses include false starts and fizzles. Many millions in state trade funds, for example, have gone to offices overseas -- most of which were founded to attract foreign investment, not encourage U.S. exports. And while plenty of states have authorized export-financing programs, only a handful have gotten around to funding them. Then too, there's the occasional initiative -- like shared foreign sales corporations, or FSCs -- that's just plain misguided.
The future? Let's hope, in this alphabet-soup world, that we'll see more CEFOs and fewer shared FSCs.
Loan guarantees for small exporters
Robert and Linda Bernstein don't look much like the owners of a multinational business. And they might not be, if they didn't have a sociable accountant.
Robert Bernstein has run SeaSpace, a small oceanographic research and consulting firm in San Diego, for the past seven years, with Linda joining him in 1987. At that time the company was ready to start marketing its first product, a $200,000 system that provides scientists with real-time data from weather satellites. The market -- government fisheries and university and government laboratories -- is small in size but global in scope: one of the Bernsteins' earliest orders came from a major lab in Taiwan.
Filling that order posed a problem. As a small business, SeaSpace couldn't finance the components it needed to build the system. Nor could the Bernsteins find a bank interested in a six-person company's first export deal. Until, that is, their accountant met somebody at a cocktail party who worked for CEFO.
With $2 million in initial funding and $131 million in export sales to its credit, CEFO is the largest and one of the most successful of state export-finance efforts. Although managed conservatively -- in four years it has had only 3 defaults on 163 loan guarantees -- its sole mandate is to help smaller companies get short-term financing for specific export transactions. As a result, CEFO is willing to offer guarantees of up to 85% to well-managed exporters whose financials scare off banks. The agency's specialty is preshipment guarantees, such as the money for the Bernsteins' system components. But it also does some postshipment guarantees -- situations in which payment is delayed, for example.
CEFO guarantees aren't unique: the Ex-Im Bank, in Washington, D.C., also offers working-capital guarantees. But the Ex-Im Bank uses a company's financials as the cornerstone for its decisions, and its average turnaround time is four to six weeks -- if an application has no problems. CEFO can be considerably more responsive, and it has the advantage of a network of bankers around the state to which it can steer customers. "They've got some good people over there," says Bruce Tower, a trade finance officer at Bank of Credit and Commerce International, which has taken several CEFO-guaranteed loans. "We respect their cautious approach."
That approach involves a good deal of due diligence -- and paperwork -- along with a fee that's usually about 1% of the guaranteed amount of the loan. And CEFO can ordinarily guarantee no more than $350,000. Still, its clients see the organization as professional, cooperative, and aggressive about financing growing exporters. "They're wonderful," Linda Bernstein insists. "It's just so different from working with any other government bureaucracy that it's amazing."
If CEFO is so wonderful, how come the Bernsteins hope they may soon stop using the organization? Well, thanks to
CEFO, SeaSpace now has a working relationship with a bank, and even wonderful help is not as good as being self-sufficient.
Poor idea, poor execution
Not so long ago, FSCs (pronounced fisks) were being hailed as "potentially the most effective export promotion tool ever." These days, that potential doesn't look so hot: only about 35 companies are involved in shared FSC programs.
Thanks to a 1984 law, U.S. companies can exempt 15% to 30% of their export profits from domestic taxes by setting up a paper corporation -- a FSC -- abroad. Since up to 25 exporters can share ownership of a FSC, the accounting firm of Price Waterhouse figured that a state could set one up on behalf of small local companies, thereby reducing each company's administrative costs. In 1986 Price convinced five states to pay in the neighborhood of $50,000 each to study shared FSCs.
What did these states get for their money? Not much. For one thing, the tax issues surrounding shared FSCs weren't cleared up until last October. In addition, Congress had already made it easier for small companies to operate FSCs than for big ones. When Price got into the act, its FSC didn't fit the small-company exemption -- and so it was no cheaper than a solely-owned FSC a small company could create on its own.
Since a tax break is a tax break, the few companies participating in the shared FSCs will still benefit. And Price Waterhouse soon hopes to provide shared FSCs that would qualify for the small-company break. Meanwhile, a competitor, Owens International Credit Inc., in Clearwater, Fla., wants the states to promote FSCs in general, shared or not.
So who knows? State sponsorship of FSCs may eventually turn out to be a useful vehicle for export promotion. But don't hold your breath.
START-UP ASSISTANCE: HATCHING NEW BUSINESSES
What makes a good incubator? Management
Ask anyone who knows about business incubators, and you'll hear about June Lavelle. Ask Joe Agati, and he'll tell you why. "June," he says, affection and awe in his voice, "is a maniac."
Agati should know. Back in 1985 he started a furniture-manufacturing company. Since 1987 he's been a tenant in Chicago's Fulton-Carroll Center for Industry, a nonprofit business incubator founded and directed by the energetic Lavelle. If he's had any problems there besides the usual day-to-day trivia, he can't think of what they are. The rent is cheap -- about a third of what the space might cost elsewhere. He didn't have to spend a lot of money buying equipment such as copiers. Lavelle and her staff reviewed Agati Furniture Co.'s first business plan and gave him tips about financing. Then there's the incubator atmosphere, which is both congenial and cooperative. When a nearby tenant needed more room to work on an big order, Agati lent him some space; when Agati recently needed an extra piece of equipment, he borrowed it from another.
Getting started in Fulton-Carroll rather than on his own, Agati concludes, has made a critical difference in his company's history, helping it grow from 3 to 17 employees. "We'd have had a hell of a lot harder time if we'd been someplace else," he says. "It's a shame all start-ups don't have this kind of resource."
That's the kind of thinking that has led to a sixfold increase in the number of incubators over the past five years. Today's more than 300 incubators -- centers for start-ups that feature shared business services -- are mostly nonprofit, with about three-quarters getting some state or local government funding. For governments, subsidizing incubators is a way of helping new companies without getting bureaucrats involved in evaluating business plans.
Do incubators work? Lavelle's -- one of the nation's oldest -- certainly does. In nine years of operation only 16% of its 142 tenant companies have failed, and the remainder have created 1,094 jobs. Still, it took her nearly five years to break even, although she started with a $1.7-million grant from the U.S. Economic Development Administration.
But it takes more than financing to make a successful incubator -- as Agati could tell you. In addition to managing the building, Lavelle helps her companies network and find financing. She organizes group consulting programs, getting high-quality consultants even though the start-ups can pay only in installments. And recently she initiated an innovative revolving-loan program that uses purchase orders as collateral, so fledgling companies can finance their first orders. "It's a rare individual who can pull off what she's pulled off," Agati says.
All of which suggests that not every incubator will offer what Fulton-Carroll offers -- and that some incubator sponsors may accordingly be disappointed with the long-term results. Still, even the most minimal benefits of a nonprofit incubator -- inexpensive rent, shared office equipment and services, a network of outside professionals -- can help a young company. As long as your expectations are moderate, your risks are few.
And if they're not moderate, you can always shoot for a spot at June Lavelle's center. But that takes time: the Chicago incubator has a 20-company waiting list, and 8 of the current tenants are awaiting additional space.
WHERE TO GO FROM HERE
The best information about government programs comes from entrepreneurs with firsthand experience; that's the only place you'll get a critical perspective on which programs are worth pursuing. But if you're starting from scratch, here are some places to begin.
* For information on the Small Business Innovation Research program, contact the SBA's Office of Innovation, Research and Technology, (202) 653-6458.
* For information on Certified Development Corps. near you, call your SBA district office or the Small Business Answer Desk, (800) 368-5855. But beware: not all CDCs are created equal. There's a huge difference between the ability, resources, and experience of the most active CDCs -- some of which have done as many as 300 deals -- and the least, which need to do only 2 a year to remain certified.
* For state programs, try either of these directories (neither is comprehensive):
The States and Small Business: A Directory of Programs and Activities, 1989. A 411-page directory of state listings published by the SBA; $12. Call (202) 783-3238.
Directory of Federal and State Business Assistance, 1988-1989: A Guide for New and Growing Companies (NTIS order number: PB88-101977). A 170-page directory published by the U.S. National Technical Information Service; $29, plus $3 handling. Call (703) 487-4650.
In addition, more than half the states now have small-business offices, toll-free hot lines, or small-business advocates. If your state doesn't, call its Department of Commerce or Economic Development. Linked-deposit programs, however, are run through the state treasurer's office.
The state government probably won't tell you about local programs, which are often the easiest to approach for financial assistance because they have the greatest stake in your success. In cities of more than 50,000, start with the economic development office, recommends Robert Davenport, of the National Development Council. In smaller towns, the best source of information may be the mayor's office or county government.
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