TC Chamber’s New Development Fund
REGION – Get capital. Grow business. Create jobs.
It's not news that access to working capital has gotten much more difficult in the last few years. This is a story about what the Traverse City Chamber has decided to do about it.
The Chamber's new Development Fund is a gap financing resource to increase growing companies' opportunities for much-needed working capital. It launched the new fund using money from the now-collapsed Traverse City Area Industrial Fund, which was dissolved after officials determined there was a better use for the money, says Chamber Board Chairman Chad Dutmers.
"This was another one of those market force changes," adds Tino Breithaupt, chamber senior vice president of economic development. Established in 1950, the industrial fund's original purpose was to move all the commercial (specifically manufacturing) development off the waterfront. It subsequently financed the development of three area industrial parks over the decades.
Then in the 1990s, its focus changed to a speculative building program. Over 15 years, the fund built and sold nine 20,000 square-foot building shells. But the last building, completed in 2006, sat on the market for two years, all the while eating into the fund balance, says Breithaupt.
It was eventually sold in 2008 to Opti Temp, which has been making regular payments on it with a balloon payment coming due in year five, says Breithaupt. That money is now directed to the new Development Fund.
"The real need now is access to capital – for working capital, inventory financing and accounts receivable financing," says Breithaupt. Financial support ranges from $25,000 to $250,000.
"Say you need $100,000 – $65,000 for new equipment to increase production and $35,000 for inventory and accounts receivable ebbs and flows," Breithaupt says. That $35,000 is hard to come by through traditional bank lending programs, he argues. "We're adding the last money onto a deal."
Mitchell Blue, assistant vice president, commercial lending at Traverse City State Bank says two things are compounding bank lending right now – the discrepancy between the net book value of a business' assets and the fair market value and declining trends in profitability.
"Banks are getting pinched by the value they can attach to a business," Blue says. "Now, values are to a point that are not supporting current lending."
And the issue of margin compression is also a hurdle. "It makes it difficult to provide financing when we can't see profitability," adds Blue.
Blue says the bank doesn't view alternative sources of financing as competition, but rather as enhancing a company's leverage when it comes to getting capital, and many of the programs want, or even require, a bank's involvement.
Dutmers says there is no other chamber that he knows of that has developed a funding mechanism like the new Development Fund. He also says he can't emphasize enough the "heavy hitter" qualities of the fund committee that approves the loans (see pg. 33).
To qualify, companies must be Stage 2, in post-revenue phase ($1 million plus) with high-growth potential and have between 10-99 employees. The program has had a "slow methodical soft launch" by design, says Breithaupt, and so far has received three applications. The committee is actively looking at two, one for $50,000 and the other for $150,000.
The total cash currently available in the development fund is $440,000. Add in the Opti-Temp monthly payment (and its balloon payment) and the fund grows to $1.4 million. Breithaupt says they'd like the fund to be upwards of $3 million and are currently investigating the state's 21st Century Jobs Fund program and the federal government's Intermediary Relending Program to apply for matching grants.
Dutmers identifies two important alternative advantages to this type of funding program: it is fueling what he describes as "a huge deficit of alternative capital sources" available locally and attracting other investors for third-stage capital.
"There really isn't an angel community here," says Dutmers. "There's not really a network, especially for growth companies. This is a first step in shining a capital markets light on northwest Michigan," says Dutmers. "We need to be able to finance, not only to help companies stay but also to attract new ones."
To this end, the fund has formed an advisory board of representatives from capital market firms and funds from around the Midwest.
"The reality is the majority of these firms aren't interested in $25,000 to $250,000 but you get to the next level, say five to 10 million, and ask them then," says Dutmers. "We plug in $100,000 now, send out an email to the advisory board and someone in Chicago says, 'Keep me in the loop for round two or three.'" BN
To view the criteria and application procedure for the Chamber's Development Fund, visit tcchamber.org/development-fund.
Development Fund Committee:
Edward Y. Albert, Jr: co-founder of two environmental analytical labs, Ceimic and Mitkem Corp.; also co-founder of Medical Staffing Network Holdings, which went public on the NYSE in 2002
Paul J. Finnegan: co-CEO of Madison Dearborn Partners in Chicago
Remos J. Lenio: founder/principal of Hartwick Capital Group in Grand Rapids
Skip Simms: vice president, entrepreneurial business development for SPARK in Ann Arbor
Doug Luciani: president and CEO of the Traverse City Area Chamber of Commerce