Five Alternatives to Traditional Bank Loan Funding

Necessity is the mother of invention and the liquidity drought, coupled with the capital adequacy requirements of Basel III, has made many US banks increasingly reluctant to lend to companies. The size and scope of the funding needs of both US for-profit and non-profit organisations, whether they be young and rapidly-growing or mature and evolving, are as varied as the organisations themselves. The five options outlined here collectively respond to the needs of a variety of different entities.

CDFIs


The
Community Development Financial Institutions Fund
(CDFI Fund) is a US Treasury Department programme that makes awards to community-based organisations known as CDFIs. All CDFIs provide financing in communities that have difficulty accessing traditional bank lending. These loans, ranging from commercial to mortgage lending, are made by CDFIs to entrepreneurs, small and larger businesses. As of February 2014, there were over 800 certified CDFIs promoting US community developments.

New Market Tax Credits (NMTC)

The federal
New Markets Tax Credit
(NMTC) was enacted by the US Congress in 2000 to stimulate private investment and economic growth in low-income urban and rural communities that lacked access to sorely-needed capital. The NMTC programme provides private investors with a federal tax credit for investments made in businesses or economic development projects located in economically distressed communities throughout the US. NMTC investors receive a credit equal to 39% of their investment made in a community development entity (CDE). The tax credit is realised over seven years.

Tax credits were awarded annually; the American Taxpayer Relief Act of 2012 included a two-year extension of the NMTC with US$3.5bn in annual credit authority provided for 2013. While the tax credit legislation expired at the end of 2013, in early-April 2014 the US Senate Committee on Finance marked-up legislation to extend the NMTC. The New Markets Tax Credit Extension Act of 2014 (H.R. 4365) has been introduced in the house, with bipartisan support.

State Tax-Exempt Conduit Revenue Bonds

Tax-exempt conduit revenue bonds are low-cost financing mechanisms through financial intermediaries. In the US state of Oregon, for example, the
Oregon Facilities Authority
(OFA) serves as the conduit for non-profit organisations for the construction, remodelling, or purchase of new facilities for health, housing, educational and cultural uses. The OFA issues the bonds, the proceeds of which are then loaned to the borrowing non-profit. The interest paid to the purchasers of the bonds is also tax-exempt, thus lowering the cost of borrowing for the non-profit.  

Qualified CRA Eligible Investments


The Community Reinvestment Act (CRA) of 1977, as implemented by Regulations 12 CFR parts 25, 228, 345, and 195, is intended to encourage US depository institutions to help meet the service, credit, and investment needs of the various American communities in which the banks operate. Banks are required by their regulators to pass these three CRA tests. While the tests vary based on the institution’s size, generally the CRA investment and lending tests require that banks demonstrate that they loan to and invest in low-to-moderate income areas and serve low to moderate income populations with investments that are “complex, innovative, and flexible.”

In practical terms, this means that banks have a regulatory incentive to enter into loans and investments that meet safe and sound banking criteria but might otherwise be passed over. These might take the form of an
Equity Equivalent Investment
(EQ2). An EQ2 may be the vehicle for allowing a CDFI to augment its capital, thereby allowing the CDFI to increase its funding to economically disadvantaged communities. These CRA qualified investments might also take the form of a direct equity investment in a limited partnership (LP) or limited liability company (LLC) that is located in an economic development zone or predominantly serves those who are low to moderate income.  

Crowd Funding

Crowd funding has become more than a buzzword globally with a growing online presence as a way to raise capital from non-traditional sources. Crowd funding takes three basic forms: outright donations or sponsorship with no expected financial return; lending; and investment in exchange for equity, profit or revenue sharing. Popular sites include
FundRazr
,
Kickstarter
and
Fundly
.

There are many alternatives when traditional bank lending is tight. A key consideration for those looking for funding is to identify common ground and shared goals with those who have capital resources, be it federal and state programmes, or private organisations and private individuals.

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