RESILIENCE
TOOLKIT
Strategies and actions for business, government, or development organizations to ensure ongoing viability.
CHAPTER 4 Financing To Be Resilient
A plan that prepares an organization or business to be resilient is a good thing. Knowing the assets and keys to organizational survival is critical. Telling the story and ensuring transparency will assure broad understanding and buy-in. But without a grasp on financials and fiscal impacts, those other elements become meaningless. To paraphrase a wise old saying, “No money, no mission.” Better put, “No money, no survival.”
This chapter provides a framework for assessing organizational financials and knowing where to turn for help. There is a vast network of resources, and knowing where to look is important. Understanding what information is necessary for such an assessment will position you and your organization to maximize both assets and data.
Understanding Your Current Cash Flow
To assess your current and future financial health, it is important to understand the free cash flow within your business or organization. Free cash flow is essentially the cash left over after a business pays for its operating expenses.
A series of templates and charts that allow your organization to get a sense of its financial situation and any vulnerabilities that could emerge in the event of an emergency is located in
Appendix 2.
Understanding Debt & How It Affects Your Ability To Borrow
Lenders will look at three main areas to determine your ability to borrow money. They will also consider the programs available to you.
These three main areas are:
- Risk
An examination of long-term and current operations to estimate whether your business will withstand certain downturns in the industry or economy. - Profitability
A measure of your earnings, net profit, or net surplus for nonprofits. - Liquidity
Your cash position.
This guide examines each of these areas and identifies how a focus on managing inventory, accounts payable, or accounts receivable may affect your current position. Understand, it’s not just about profitability, but also about managing cash and your debt.
CASE STUDY
A company was sold to one of its managers who is now taking over. The manager took out a loan to help her finance the purchase. Due to COVID, company revenue went from $6 million to $4 million but is now starting to grow back. The problem the new owner is facing is not having the cash flow to keep going. She’s looking at an SBA-backed program loan to help.
In reviewing her finances and asking the same questions as done in the previous section, we found two main issues:
- When calculating her cash conversion cycle, her business was too low compared to her industry partners. She worked to increase accounts receivable by seven days and delayed her accounts payable by 14 days without penalty. This freed up $200,000 in cash flow by simply managing cash flow.
- When looking at her gross profit, her company was similar to industry peers. However, when factoring in her interest payments, loans, and the cost of growing a business, she was slowly going broke. She was able to restructure some of her debt using an SBA-backed loan. That helped her get working capital to assist with growth while extending the loan payments so she could continue to make payments.
Understanding Your Risk
Risk can be defined in many different ways. A banker has a different perspective than a business owner, and mitigating risk is a valuable strategy. After all, less risky decisions or operations could enhance the flow of capital – at least from the perspective of a loan officer or investor.
Examining Risk
When examining your risk, consider the following:
- Management team
- Market viability
- Product and service viability
- Financial management
- Key risk identification
A series of worksheets and templates will guide toolkit users to identify and understand the risks within their operations. Those exercises may prompt new strategies and allow for strategic actions to enhance organizational resilience. See Appendix 2.
Resources For Businesses, Nonprofits, & Governmental Entities
Funding For Communities
Understanding the development finance spectrum is critical to maximizing the resources available in a community. A toolbox approach brings together the best financing concepts into a comprehensive package for a community to meet its financial needs.
These five bedrock tools will be covered in this section:
- Bonds
- Targeted Tools
Tax increment finance - Investment Tools
Federal and state tax credits - Alternative Lending Tools
Revolving loan funds - Federal and State Support Tools
EDA, USDA, IEDA, and HUD programs
Many financial resources exist at local, state, and federal levels to support businesses, organizations, and institutions, both at normal times and in the case of emergency.
Knowing where to look for assistance can be frustrating. A series of loan and grant programs, as well as special funds available in 2021 for those responding to the COVID-19 crisis is located in Appendix 2.
Bonds
Bonds are the bedrock of public development finance. In its simplest form, a bond is a debt or a loan incurred by a government entity. The bonds are issued and sold to the investing public, and the proceeds are typically made available to finance the cost of a capital project.
Setting up a bond program is complex. This guide is an introduction to the different options. The 'Resources In Your Region' section on page 44 will help you find your Council of Government or Economic Development Group to explore further.
The following are examples of types of bond programs:
Small Issue Industrial Development Bonds — These are often referred to as small issue manufacturing bonds, and they are the most common tool used to finance the manufacturing industry.
501(c)3 Bonds for Nonprofits — Two types of bonds are mainly used for nonprofit organizations: qualified hospital bonds and qualified non-hospital bonds. The latter type is used for educational and charitable institutions.
Exempt Facility Bonds — Used to finance a wide variety of projects, including airports, mass commuting facilities, and water and sewage facilities.
Targeted Tools
A tax increment financing (TIF) district is a mechanism for capturing the future tax benefits of real estate improvements to pay for the present cost of those improvements. It can be used to secure funding for either distressed or undeveloped areas in a community.
Setting up a TIF district would require the following:
- Set the TIF district’s geographic boundaries.
- Establish the initial assessed value of the land in the district.
- Create an analysis of current tax revenue from the property tax, sales tax, and other taxes to benchmark the current tax level.
A TIF district generates money for development or redevelopment for a local government by capturing the tax revenue above the initial assessed value during the life of the district. The tax increment from a TIF district is created without raising taxes or using base tax revenues. The TIF becomes a repayment stream for debt used to finance some aspect of what is driving the increase, such as retail, commercial, residential, or mixed-use development.
A TIF district is often used to advance economic development priorities, including:
- Support overall development within a geographic area.
- Develop industry niches and open new markets for services that do not exist.
- Guide public finance dollars towards targeted investment and development.
- Assist with sewer expansion and water repair for a community.
- Acquire properties and buildings.
- Expand or construct streets.
Tax increment financing provides local governments with a funding mechanism that does not rely on federal or state funds. The TIF district captures the tax increment itself and is drawn to direct benefits to a specific area, typically an economically disadvantaged area. The life of the district can be anywhere from 10-40 years or enough time to pay back the costs or bonds issued to fund the improvements.
This is an introduction to TIF. Contact your local council of government to learn more.
Investment Tools
Tax credits can be used for several types of development projects, including targeting specific community sectors, such as low-income neighborhoods, historic districts, and underserved markets. Tax credits can help investment in an area or project by providing an increased internal rate of return for investors, reducing the interest rate on a particular financing package, or providing a repayment method for investors in place of cash.
Tax credit programs allow businesses and investors to claim a tax credit for committing resources to a project or business. The authorizer of the tax credit will determine the type of project and type of tax credit that can be used.
Federal Tax Credits Available
Historic Preservation Tax Incentives — This type of incentive was designed to discourage the demolition of older buildings. It offers a credit against the total federal taxes owed. The credit is equal to 20% of qualified rehabilitation expenditures devoted to a historic structure and 10% for non-historic structures.
New Markets Tax Credits — This was created to generate additional capital for economic development projects in low-income communities. It provides a 39% federal tax credit for qualified equity investments working in targeted low-income communities.
Low-Income Housing Tax Credits — This promotes the construction and rehabilitation of housing for low-income individuals. Each year the state of Iowa receives an inflation-adjusted, per person funding allocation for the issuance of tax credits for qualified housing development. Iowa Finance Authority is responsible for issuing these tax credits.
State Tax Credits Available
Iowa Economic Development Authority (IEDA) manages many of the state tax credit programs, which can be combined with federal tax credit programs. Listed below are a few of the programs administered through IEDA. More can be found at iowaeda.com.
Workforce Housing Tax Credit — This credit assists with construction or rehabilitation of housing in communities with workforce housing needs. This program provides tax benefits to a developer to provide housing in Iowa communities, focusing especially on those projects using abandoned or empty properties.
Redevelopment Tax Credits — These credits are available for redeveloping abandoned or underutilized spaces, commercial properties, or public buildings. Developers in Iowa can receive tax credits for redeveloping properties known as brownfield and greyfield sites.
Disaster Workforce Housing Tax Credit — This credit is designed to provide incentives for broadband development and workforce housing in disaster-impacted areas of Iowa. It allows tax credits for qualified housing projects in counties with a presidential disaster declaration.
Innovation Fund Tax Credit — The Innovation Fund Tax Credit was created to stimulate venture capital investment in innovative Iowa businesses. Individual investors receive tax credits equal to 25% of an equity investment in a certified innovation fund.
New Jobs Tax Credit — This credit assists businesses and expands employment opportunities by applying a one-time corporate income tax credit for participants in a new jobs training program. Iowa offers this credit as an incentive for businesses that provide additional training to employees and expand their workforce.
Alternative Lending Tools
Revolving Loan Funds (RLFs) — These financial tools can be used by small and mid-sized businesses to help them get started or expand. RLFs provide a business with a flexible source of capital that can be combined with other sources and funding options. RLFs are used in many instances to help provide gap funding between a loan amount and the amount the business needs.
For more information on Revolving Loan Funds, see Appendix 4.
Federal & State Support Tools
Appendix 4 includes an extended list of loan and grant programs offered by a range of entities, from the state of Iowa to federal agencies like USDA and HUD.
