A CEO explains how he found offering short-term taxable bonds through his bank an attractive alternative to loans.
There's more to raising capital than tapping bank loans or selling equity, as Steve Marks can attest. The president of Main Street Muffins has pushed his eight-year-old Akron, Ohio, company to $8 million in projected sales and two listings on the Inc. 500 by pursuing nontraditional sources of capital.
Marks has displayed a remarkable sense of financial savvy from the beginning. His first financing package -- in 1987 -- was a 20-year loan for $175,000, subsidized by the City of Akron at a fixed interest rate of prime minus 3%. The loan was supplemented by a $25,000 grant from the city. In 1990, as the company outgrew its existing space, it borrowed $350,000 at 4%, through the Akron Regional Development Board (ARDB), to finance the conversion of a former meat-packaging plant.
Now, for the really fancy footwork. Armed with an estimate that Main Street needed more than $1 million to finance the construction of a building for its next growth stage, Marks began putting out feelers to the ARDB. "But I also talked to our bankers about what we needed, and they asked us to consider a new program they were offering, which ultimately cost us a good bit less," he recalls.
The new financing vehicle takes Main Street away from the city-subsidized loans that are fairly typical in disadvantaged urban areas and into the more exotic realm of private financing. The muffin company raised $1.2 million by selling taxable short-term bonds (with a maturity of one week) to the commercial customers of its banker, National City Bank. The bonds are listed in Main Street's name, but the bank guarantees their payment, for a credit fee of around 1%.
Although the deal was unusual, Marks emphasizes that his legal, accounting, and closing costs "probably came to no more than $40,000 -- very reasonable when borrowing this much money." But the biggest attraction to this financing method was its low cost: "Our first interest charges were only 3.7% -- and even with the rise in interest rates that has taken place since then, we're still only at 4.55%," he said in July. For business owners concerned about committing to interest rates that, essentially, fluctuate each week, Marks notes that "we could have bought a 6% interest-rate cap for about $50,000, but we weren't that worried."
Although the arrangement was complicated, the logistics since closing have been quite simple: "Our bankers send us a fax each week telling us what interest rate we'll be paying," notes Marks. "Then they send us a bill at the end of the month."