It’s common to hear lots of misinformation on the street about economic development loans. So, we are going to help set the record straight.
Economic development loans are simply loans done with the intention of retaining or creating jobs that enhance or go beyond the parameters of conventional loan underwriting. Typically, they are done through economic development agencies such as the Greater Reading Chamber Alliance (GRCA) but even conventional bank lenders have access to this arena through such programs as the Small Business Administration (SBA) 7 (a) loans.
The reason it is necessary to go beyond the boundaries of normal bank lending are numerous. Banks must live within their own lending formulas that limit the amount money that can be extended and the quality of collateral that can be accepted. Although economic development loans do have their maximum boundaries as well, they are typically able to stretch the lending criteria to allow companies to structure a package that would not otherwise be possible.
How is this done?
First, most economic development loans are not substitutes for a conventional bank; they partner with banks. That means a loan package will be structured with a bank loan, an economic development loan, and the appropriate amount of equity from the borrower. The inclusion of an economic development loan helps to diffuse the risk that a single lender has as the major source of capital in a deal.
Second, frequently economic development loans will take less secure collateral. This is accomplished by being a taking a lien position that is subordinate to a bank or collateral that is unrelated to project that is being structured.
Third, economic development loans will consider higher loan to value ratios on collateral than conventional lenders as well. This typically translates into a reduced cash injection from the borrower.
Last, many, but not all, economic development loans can provide long term, fixed interest rates that can be less than market rates. For example, the Pennsylvania Industrial Development Authority (PIDA) currently has interest rates as low as 2.75% with a term of up to 20 years.
The GRCA has 50 years’ experience in economic development lending through its affiliate the Greater Berks Development Fund (GBDF). We have a number of sources that we use to assist local companies to make projects happen.