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.
The Entrepreneur:
Larry Hatfield, 50, Durant, Okla.; president, Durant Molding & Manufacturing Inc. and Custom Molded Plastics Inc.
The Opportunity:
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.
The Problem:
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.
The Deal:
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
Total $4,590,000
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.
