Issuing Bonds as an Investment Alternative

Recently, I was on the airplane and picked up BusinessWeek/SmallBiz magazine that someone had accidentally left behind. I was flipping though it and I came across this really interesting article on how small businesses are using bonds as an alternative investment vehicle than loans or venture capital.

I know, you think bonds=boring, but hear me out. That is what I thought but this headline caught my eye:

“Small companies can issue low-interest Industrial Development Bonds, or IDBs, to buy land or equipment or build new facilities”

You didn’t exactly have me “at hello” but you had my attention and I wanted to read more.

In the past, small businesses had two routes – loans or investment capital. But for many small businesses who are not in the “venture capital radar” or don’t want to give up a chunk of their company that they have already worked very hard to get on a good growth track. Loans are also an alternative but many look at it as debt that has too many strings attached to it. So what is left? In this case, bonds.

Because of the credit crunch many people have had a hard time raising capital or lines of credit that they usually would be able to get and this bond investment vehicle has become a nice alternative.

Here is the heart of the opportunity taken from the article:

“By using a little-known set-aside in the public finance world called an industrial development bond, or IDB, small companies with strong track records can gain access to as much as $10 million with rates as low as 3%—similar to what large corporations get in the commercial paper market. (Up-front fees range from $70,000 to $200,000, but total costs are still about 20% to 30% less than conventional bank loans.) And while IDBs were designed to be used specifically by small manufacturers, the definition of “manufacturer” may surprise you, as the American Recovery & Reinvestment Act expanded it to include technology companies that manufacture software or other intellectual assets.”

There is a catch (isn’t there always?):

“The proceeds from such bond issues can be used to buy land or manufacturing equipment, and to build new facilities. To ensure that IDBs contribute to economic development and therefore deserve their tax-exempt status, companies that issue them must promise local finance authorities that they will hire a predetermined number of employees over the life of the bond.”

Still I would give the article a full read and see if this might be a good alternative for you.

This entry was posted on Friday, September 11th, 2009 at 8:00 am and is filed under Raising Capital, small business. You can follow any responses to this entry through the RSS 2.0 feed.


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