Bonds an Attractive Source of Funds for Capital Improvement Projects

Pallet companies looking to expand their operations may want to consider various types of bonds that may be authorized by their local and state governments to finance capital improvement projects.

            Bonds may be very attractive because of interest rates that are significantly lower than those associated with conventional financing. However, they may require a considerable commitment in terms of time and up-front costs.

            Pallet Enterprise discussed this type of financing with pallet businesses in Wisconsin and Illinois. Both utilized bond financing for large capital improvement projects, and the owners of both companies recommended this method of financing.

            Performance Pallet in Seymour, Wis. received a $3 million industrial revenue bond allocation from the state Department of Commerce. The bond will finance the purchase, renovation and equipping of a vacant 104,000 square foot warehouse. “We are on the tail end” of the project, said company owner Jim Brill.

            The industrial revenue bond was suggested by his banker. “The money is actually funded by the commercial lender,” Jim explained. “If you have a good relationship with your lender, they will identify that and recommend it.”

            The interest rate is “very much lower” than the prime lending rate, which will save Performance Pallet hundreds of thousands of dollars in interest over the period of the loan, said Jim.

            It is not a quick process, however, and there is a significant cost to the applying company in both money and commitment. The costs are for legal fees and other professional expenses, he explained. The process itself took nearly a year.

            “It can be very cumbersome,” said Jim. “After having gone through it, based on the interest rates, I would still say it was worth it.”

            The bond required approval from local and state officials, and the process involved a considerable commitment for meetings, conference calls, and various documentation, although Jim had a good grasp of what would be required at the outset.

            “If the opportunity arose, I would do it again,” he said.

            There was one other caveat that Jim mentioned. “It has to be a big enough project,” he said, “or the cost and time involved don’t warrant it…If it is a large project, it makes sense. If it is not, it doesn’t.” A minimum project would be about $1.5 million, he suggested.

            “I think the key is to discuss this with your commercial lender and look at it as an option,” said Jim. “That institution is going to be very critical to the whole process.”

            Walter Pollack president of Northwest Pallet Supply in Chicago, took advantage of a state revenue bond to finance a relocation and expansion that included adding to its automated pallet repair line.

            He, too, became aware of the bond financing through his banker. “That kind of funding goes quick,” he said, but some bond funds were still available.

            The interest rate on his financing is a variable rate that currently is less than 1%. The company saved about 75% of the interest it would have paid for financing through conventional markets, he estimated.

            Walker acknowledged the up-front expenses and considerable hurdles in the process. The expenses amounted to about 1.5% of the loan, he indicated. The expenses included legal fees and other professional costs, points, processing fees, and more.

            In Walter’s case, he elected for his attorney to handle all the various meetings, document preparation, and other steps, limiting his role largely to signing papers. “If you don’t have an in-house attorney, there are enough things to do that it can become a distraction if you are trying to run a business,” said Walter.

            Walter said he would “absolutely” recommend this type of bond financing to others in the pallet industry.

            “You need to be committed to growing,” Walter added, “in order to really take advantage of this type of financing…”You have to have a pretty ripe business plan…I wouldn’t go into it with the hope that something is going to happen.”

            In the case of Northwest Pallet Supply, the company’s new facility was located in an area that had been designated an Enterprise Zone, which made the project even more attractive. Enterprise Zones offer tax incentives to attract businesses. The Enterprise Zone status allows Northwest to receive a $6,000 tax credit for each employee who obtains certified training at a local community college. The company has had a number of employees who received certified training for forklift operations and other skills, according to Walter.

            These various types of bonds may be used for buying land and buildings, construction, and investments in machinery and equipment, and other development costs. In some cases proceeds may be used to pay for the cost of issuing the bond itself. Loan conditions may vary, depending on the lending institution.

            Pallet companies that are interested in more information about this type of bond financing should consult with their lender or contact local or state officials or elected representatives.