Opinion ID: 1578403
Heading Depth: 1
Heading Rank: 11

Heading: Need for and Benefits from Business Development Financing Programs

Text: 106. The ability of small businesses to secure adequate financing is often limited. Interest costs may be prohibitively high, banks may be loaned to their lending limits, or the geographic location of major lenders may not be accessible to the potential borrower. Dayton Aff.; Laubach Aff.; Auger Aff.; Constance Aff.; Peterson Aff.; Trim Aff. 107. The primary sources of financing business development projects in Minnesota are commercial banks, savings and loan associations, insurance companies, venture capital companies, and public sources, such as municipal industrial revenue bonds, and state or federal loan and grant programs. Dayton Aff.; Auger Aff. 108. The use of industrial revenue bonds in Minnesota has increased dramatically in recent years. However, it is impractical to finance small business loans for less than $100,000 with industrial revenue bonds because of high legal and underwriting costs. Also, pending federal legislation threatens the tax exempt status of industrial revenue bonds and may restrict the amount of industrial revenue bonds that can be issued in each state. Dayton Aff. 109. Because of the importance of small and medium sized businesses in job creation and the difficulties these business have in obtaining financing, there is need and support for the expenditure of state funds to assist the establishment or expansion of small and medium-sized businesses in Minnesota. Dayton Aff.; Laubach Aff.; Auger Aff.; Constance Aff. 110. Public financing is of great importance in that it leverages private financing. Private lenders generally provide only part of the financing for a project, and the borrower is expected to provide the balance. For small businesses, it is often difficult to make up the balance, and good business development projects may never be undertaken for lack of financing. Public financial assistance helps bridge the gap between what the private lender will loan and what the small business needs to finance a project. Dayton Aff.; Auger Aff.; Constance Aff. 111. Providing public financing for business development at less than market interest rates creates incentives for additional private investment and enables a business to have more capital available for operating purposes. Lower downpayments and lower interest costs made available through public financing enable a business owner to conserve working capital while, at the same time, increasing the rate of return on investment. The result is an economically more stable business. Dayton Aff.; Constance Aff. 112. Providing public service to commercial and industrial areas in a community is expensive from the standpoint of local government. Public safety, fire protection, public works, and utilities are more costly in commercial/industrial areas than residential areas. Public and private investments in commercial areas result in increased taxable property values, which helps balance out the high costs of providing public service and ensure that local tax receipts are sufficient to pay local government costs. The beneficiaries of an increased local tax base are the general public. Dayton Aff.; Constance Aff.; Peterson Aff.; Trim Aff. 113. Public financial assistance also helps small businesses invest in new plants and equipment which they could not otherwise afford. When a business invests in new plants or equipment, new permanent jobs are normally created. Residential construction normally results only in temporary construction jobs, while commercial and industrial construction results in both construction jobs and long-term manufacturing and business jobs. New equipment or plant expansion normally improves productivity, which means new inventory handlers, sales staff, shippers, and administrators will be hired. Dayton Aff.; Auger Aff.; Constance Aff. 114. Public financing of business development helps create jobs. New and expanding businesses normally establish entry level jobs which can be filled by persons with minimal training or employment experience. Because these people are the ones hardest hit by unemployment, financing small business expansion has tremendous public benefit. Dayton Aff.; Auger Aff. 115. In addition to the direct benefits derived from public financing of small business expansion  increased tax base and employment  there are favorable secondary economic effects. Jobs are created in businesses not directly financed because of the increased demand for goods and services by the new employees of the financed business. Additionally, business development around the financed business may increase to provide raw materials for that business or an outlet for its finished products. Dayton Aff.; Auger Aff.; Constance Aff. 116. The major advantage of the Authority over its predecessor, the Small Business Finance Agency, is that it is a one stop shop for all financing programs offered small businesses by the state. The owner or manager of a small business only has to talk to one person to find out what program of financial assistance will best meet the needs of his business. The Authority's employees are cross-trained on all programs to provide the easiest, most efficient service. No longer is it necessary for a small business owner to travel between a variety of state offices to explore possible sources of financial assistance for business expansion. Laubach Aff. 117. On the average, for each $55,500 loaned to a small business by the Small Business Finance Agency (the predecessor agency of the Authority) for a business development project, one full-time job was created. Money loaned to businesses for expansion by federal, state or local government does serve to create jobs. Laubach Aff. 118. In Minnesota, municipalities that intend to issue revenue bonds must have those bond issues approved by the Commissioner of Energy, Planning and Development pursuant to Minn.Stat. § 474.01 (1982). The application must include the proposed amount of the bond issue and the approximate number of jobs to be created. Based on applications for bonding approved from 1970 through 1983, there was to be an average expenditure of $46,600 for each full-time job created. If pollution control issues are eliminated from the calculations, the per job cost in 1981 was $40,200; in 1982 was $36,400; and in 1983 was $36,700. After July 1, 1983, the approval of bond issues pursuant to Minn.Stat. § 474.01 was transferred to the Authority by Minn.Laws 1983, ch. 289, § 113. Laubach Aff. 119. Sale of revenue bonds to finance business expansion creates jobs at a reasonable cost. This type of financing is necessary to fill a gap left by the commercial loan policies of conventional lenders which favor larger established companies. Frequently, the minimum loan requirements of commercial banks prevent financing projects for small businesses. There is a need on the part of small businesses for financial support from government if they are to create jobs. Laubach Aff.; Peterson Aff.; Trim Aff.