Need Equipment for Business? State Program Helps You Buy It

Thinking about buying equipment to expand your manufacturing operations? Worried about qualifying for a bank loan?

Government may have a solution for you in the California equipment-only purchase program, a little-known state effort to make equipment financing available to small and mid-sized companies at rock-bottom interest rates--commonly 2 to 3 points under prime.

In essence, the program allows businesses to finance their equipment purchases by issuing corporate bonds disguised as municipal bonds. Investors earn interest on the bonds free of income tax; the tax break, of course, accounts for the low interest.

The state has $10 million available through the program this year--a drop in the bucket, really, when you consider the capital financing needs of business in California. But it’s cheap money, and because getting it is relatively easy, the program can be an excellent source of capital.

Technically, the program allows you to obtain new equipment with low-interest, lease-purchase financing--that is, with an inexpensive lease structured like a long-term purchase contract such that, after you make your last payment, you own the equipment.

Manufacturers of virtually all kinds qualify for this program, as do other businesses that “add value” to their products--a technical term meaning that your product must undergo change as you prepare it for market. (The state interprets the meaning of the term liberally. A food processor, for example, does not qualify if it merely packages its product, but a water bottler does if it purifies the water during processing. Wholesalers and distributors do not qualify, as a rule, but companies that assemble goods for sale do.)

What’s involved in tapping this source of capital?

For starters, you must demonstrate that the equipment you want will add jobs to your operation or yield some “substantial public benefit”--another technical term by which the state makes the financing available to waste handlers and even recycling companies.

You must show three years of financial statements, and your credit must be good enough to qualify you for an ordinary commercial lease. In plain English, this means you must have good if not sparkling credit, because leasing companies aren’t as picky as commercial banks.

You fill out a simple, two-page application obtainable from the California Statewide Communities Development Authority, a state agency headquartered in Walnut Creek ([800] 635-3993). You must detail your plans and the jobs you expect the new equipment to create.

You go before your city council or county supervisors for a public hearing, and you need an approval from the California Industrial Development Financing Advisory Commission, acting on behalf of the state.

That done, the Communities Development Authority issues bonds in an amount equal to the value of the equipment you need and sells them to investors. Using the proceeds of the sale, you get your equipment, put it to work generating new revenue for your company, and pay back the bonds over time--commonly five to seven years.

It can take 60 days to complete the process, often less, according to Steve Hamill, program director of the development authority.

The cost? Usually a maximum 1% out of pocket, plus another 2% payable from the proceeds of the sale, Hamill says.

Last year nine California companies sought equipment financing through the program, and all nine qualified, he adds. Their equipment purchases ranged to a high of $3.5 million, financed by bonds earning fixed interest between 5.25% and 5.87%.

“It’s the low interest that really makes this program viable,” Hamill says.

“This program puts new equipment to work on the factory floor at a financing cost 2 to 3 percentage points under the prime rate. You know how in real estate the three most important elements are location, location and location? Here it’s interest, interest, interest.”

Best of all, he adds, the program targets small and mid-sized businesses, which often find it hard to qualify for commercial bank financing. Most job growth takes place among such businesses, and that is a primary reason for the state’s support of the program.

“The smallest deal we did last year was for about $260,000, and the business paid costs totaling 3 points--about $9,000, of which only one-third were out-of-pocket expenses,” Hamill says.

“It’s hard to find better financing for the owner of a growing business.”

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Columnist Juan Hovey may be reached at (805) 492-7909 or at [email protected].