Funding Growth Projects

Doug DevereauxClara AsmailNIST MEP

Presentation to INEAPApril 25, 2012

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MEP Manufacturers Capital Access Assessment

• MEP seeks to support manufacturers in gaining broader access to the capital and financing essential to spur innovation and growth strategies, now and into the future.

• The ability of SMEs to connect with and access capital is critical to achieving growth and innovation.

• SME’s capital needs differ from other types of small businesses: greater need for capital intense fixed assets (e.g., machinery or equipment) and a high cash conversion cycle that requires them to have higher short-term capital options with flexible terms.

• To address the barriers to accessing capital specific to the needs of SME’s, MEP requested Booz Allen Hamilton’s support in a new initiative to strengthen MEP’s role in sustaining and growing America’s manufacturing base by identifying solutions that improve access to capital.

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Key “Demand” Findings on Capital Needs of Small Manufacturers

Common Small Manufacturer Capital Needs*1. New Construction2. Expansion, Land or Building Acquisition3. Facility Improvements and Remodeling4. Leasehold Improvements5. Machinery and Equipment6. Research and Development, Innovation7. Working Capital (Inventory, Accounts Receivable) 8. Refinancing, Capital Restructuring 9. Other Types of International Growth

There is an unmet demand for working capital financing

Small manufacturer capital needs differ from other types of small businesses due to:

greater need for capital intense fixed assets (e.g., machinery or equipment)

long cash conversion cycle requiring flexible short-term capital options to meet payment terms

*SMEs have a greater demand for this need

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Primary and Secondary Causes for why SMEs experience capital access challenges

Underutilized or Unavailable Programs

Challenges in Accessing Available Capital

Reluctance to Access Capital

Changing Capital Needs and Growth Strategies

Economic Recession

Limited Awareness of Capital Options

Constriction of Capital Markets and Tighter Lending Standards

Declining Company Revenue and Asset Values

Time/Resources Needed to Find Alternative Sources

Limited Marketing or Outreach to Raise Awareness of Programs

Perception that Capital is Inaccessible or Unavailable

Unwillingness of Manufacturers to Take On New Debt or Give Up Equity

Lenders’ Underutilization of Government Programs

Program Design Does Not Target Needs of Small Manufacturers

Desire to Diversify Products or Use Untraditional Sources

Increased Need for Working Capital During Recession

Lenders May Overestimate Manufacturing Lending Risk

Manufacturers’ Weak Financial Documentation and Business Plans Capital

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Causes Related to the Supply of Capital in the Market

Causes Related to Small Manufacturers’ Demand for Capital 4

Gap analysis revealed strengths and weaknesses in availability, accessibility to, and awareness of sources of capital

… and confirmed that larger barriers exist in awareness and accessibility

A nationwide network of community banks, CDFIs, and small business centers complement the larger banksSMEs may be able to access additional financing that is offered to businesses in particular states or regionsManufacturers and lenders may avoid federal/state programs due to paperwork and program requirementsNavigating federal programs to find applicable sources is a significant challenge expressed by all stakeholdersCompanies may have difficulty qualifying for financing due to tighter lending standards and low risk tolerance

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The SBA 7(a) and 504 programs are widely recognized by stakeholders interviewed

MEP’s nationwide network of centers provides the infrastructure to disseminate information on capital sources

Many small manufacturers may not be aware of non-traditional capital sources or growth financing optionsCompanies may not know how to approach lenders/investors and prepare financial documentationLenders may not fully understand how to evaluate risk due to limited understanding of manufacturing sector

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Intermediary lenders of all types may be underutilizing the guarantees available through government programsCapital is less available for certain funding ranges (e.g., $150k -$500k) or growth stages (e.g., mezzanine)Shortage of working capital, fixed asset and refinancing products, especially for firms with <20 staffLess than 20 federal programs target small manufacturers

Private equity funds that invest in manufacturers, especially in rural areas, are in short supply

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Stakeholders believe a strong supply of capital is available

Over 85 federal programs provide funding for small businesses or small-to-large size manufacturer needs

Federal programs provide funding for R&D, energy efficiency, international growth, and economic development

Many large banks focus on serving small businesses with leasing, lines of credit, and asset-based lending

Private equity is available for certain manufacturing sub-sectors and in certain geographic areas

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Gap analysis led to recommended strategies for addressing identified accessibility and awareness gaps

Difficulties experienced by small manufacturers in accessing federal programs due to:

(1) challenges in navigating federal websites to find funding opportunities(2) time consuming process to track application deadlines and complete paperwork

MEP will consider developing tools such as:

• Self-diagnostic learning tool and online resource of available federal programs

• Business assistance on best practices for applying for federal grant programs and managing accurate financial records required for grants

MEP will collaborate with federal stakeholders to identify areas where paperwork could be standardized or reduced

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Prototype of Capital Sources Inventory

Identified diversity of capital sources (500+), federal/state/private/equity…

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“MoneyTech” project premisesSupply Side: misconceptions among providers of capital regarding needs, risks, and creditworthiness of SMEs

Demand side: lack of awareness and understanding of the different types of financial products and services and how they are accessed

INFORMATION GAP exists between those who provide capital and those who need it

• MEP, with partners, can develop learning platforms for SME’s, programs, and practitioners to narrow the information gap and to foster synergy and coordination of resources and programs at local, regional, and national levels.

• No matter how complete the tools, the complexity and diversity of resources confirms to SMEs the value of the MEP as a catalyst to provide assistance with navigation.

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Next Steps

• Near-Term Partnership and Communications Strategy Implementation Support that will include outreach to key federal stakeholders, other partners and MEP Centers to raise awareness and increase access.

• Short-Term Capital Access Business Assistance Market Testing and a “MoneyTech” Pilot development to evaluate, design, and implement (including market testing) a pilot platform(s) for learning, or “MoneyTech” service offerings (e.g., financial modeling tools, grant-writing or loan application training, self-diagnostic capital assessment tools).

– Federal agencies are invited to partner with MEP in promoting specific capital programs or generalized program in support of mission of access to capital project

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Summary

• MEP is serious about helping manufacturers grow, recognizes that growth strategies require funding, and is developing tools to identify sources of capital and matching them with manufacturers’ needs

• BAH has delivered a report that summarizes capital supply and demand findings and observations regarding accessibility, availability, and awareness gaps, and has provided recommendations for MEP to address those gaps

• MEP Centers are staffed with engineers (mechanical, industrial, etc) who may not be qualified to provide financial decisions supports. MEP is planning to develop a tool that will “automate” the process and identify relevant key information needed from the client manufacturer to facilitate the matching of capital needs with appropriate source(s)

• The next phase in the MEP Access to Capital program is to let a contract to a vendor who will develop a pilot “MoneyTech” tool incorporating content on the federal, state, private etc programs that provide loans, grants and equity-based financing for SME growth, and importantly, facilitate the extraction of financial information relevant to specific funding sources in order to build and represent the fundability of manufacturers

• Participation by MEP Centers in the development of “MoneyTech” will enhance the usability and effectiveness of pilot tool.

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http://www.nist.gov/mep/reports.cfm

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