*Some specific exceptions do exist.

NOTE: the SBA 504 Loan Program considers the EDA RLF as equity.  Also, it should be noted, staff has received this general concern/ request in the past from other Ramsey businesses--this is not an uncommon concern. 

APPLICANT/ BUSINESS
The business considering the EDA RLF is American Print & Digital.  They are located of Radium Street in eastern Ramsey, just south of Bunker Lake Boulevard.  They currently lease about 5,000 sf in a multi-tenant spec building.  They are a "broker" style printing firm.  Meaning, they don't work with end-user customers directly--they only work with brokers.  Brokers sign contracts with American Print & Digital for work.  They have 7 full-time employees.  The business started in 2009 and has steadily grown year-after-year.

American Print & Digital needs room to grow, at least 10,000 sf total.  They recently placed an order for a very expensive piece of equipment, which they already have enough orders to run for a minimum 6-hours per week, and expect at least 20-hours per week immediately when it's installed.  The new piece of equipment allows them to expand their production capacity to larger runs, on physically larger pieces of material, and to produce product quicker/ cheaper.

Please see attached cover letter from American Print & Digital for details.


THE PROJECT
American Print & Digital has a purchase agreement in place for the former "All-Brite Printing" building located between Do-All Printing and Lano Equipment on US Highway 10 (6320 Highway 10).  This building is just less than 15,000 sf, and is set up ideally for their operations.  Some renovations are needed.  This purchase will allow for expansion of their business, placement of their new machine, and room for small future expansion.  Additionally, in the short term, American Print & Digital plans to sub-lease a small portion of the property until they need it (about 3,000 sf).

The project is about $1.4M total--in which American Print & Digital is seeking financing, with about $600,000 of the total project costs are the new machine.  The Bank of Elk River has tentatively indicated they would fund 50%, the SBA (via the development corporation) has tentatively indicated they would fund 40%, and the owner has indicated they would like the EDA RLF to cover 5%, and for owner equity to be 5% (20 year term, Bank lien 1, SBA lien 2, City lien 3).

The owner is requesting 5% EDA RLF financing to allow equity dollars to be dedicated to ongoing business working capital needs.  The printing industry requires a significant level of working capital to upgrade machines, repair machines, and purchase ever-changing software.  It is not uncommon for these unexpected costs related to machines to cost several hundred thousand dollars.  American Print & Digital can physically make the deal happen without without the EDA RLF.  However, they want to be prudent/ smart about how they are growing their business planning--and they want to make sure they can digest their growth. 
 

NOTE: a common pit-fall for quickly growing small businesses is to not have enough money available in working capital, and outstrip their ability to digest their growth (i.e. they don't have enough working capital to pay for short term expenses incurred as a result of their quick growth).  This can happen by putting too much equity into the upfront project, and not leaving dollars for working capital.  American Print & Digital is attempting to avoid this potential problem via this request to the City.

SBA 504 PROGRAM
Please follow this link: http://www.cmdcbusinessloans.com/tools-resources/sba-504-sba-7-a-comparison

 

(1) The guidelines require a minimum 3% interest rate.  Since the great recession, interest rates available through private banking institutions have been very low.  Additionally, traditional economic activity has been relatively sparse, until recently.  As a result of these items, demand for this program has been low.

(2) Small businesses commonly use the SBA 504 loan program.  That program doesn't stack well with the EDA RLF program.  As a result, businesses often cannot use the EDA RLF program.

With the above information in mind, and the request from American Print & Digital in-hand, staff believes it might be worth it for the EDA to consider a exception and/ or amendment to the EDA RLF Guidelines.  More specifically, to allow for equity to dip down to 5% in situations in which the SBA 504 Loan Program is being used by a business.

Here is a preview of what the EDA RLF would look like in this scenario:

50% Bank
40% SBA
5% EDA RLF*
5% Owner Equity

*10 year term, third lien, about $70,000. 
NOTE: staff has received conflicting information on the minimum required term for the EDA RLF.  Staff has the perspective to attempt to minimize the city's loan term.  There is a chance the EDA RLF will be required to match the SBA 20 year term.  In that scenario, we would also need to have an exception to our EDA RLF Guidelines on maximum loan term (from 15 years to the SBA required 20).  This question (RE term) will be answered if/when an actual application is brought forward (i.e. February).

*NOTE: these items are not unique to this specific situation.  The very essence of why the City EDA RLF exists--is to cover financing gaps that the private sector would not normally fund alone (i.e. riskier situations).  The question here is shades of grey/ or various levels of comfort RE risk tolerance for the City.  Are we okay with 5% equity rather than 10% on SBA deals--both are generally risky levels of equity--one is more risky.

Allow for an exception to the EDA RLF Guidelines, to allow for minimum equity, in the amount of 5%, for American Print & Digital.

-and-

Direct staff to bring back a future case to discuss updating the EDA RLF Guidelines.