Examples of automotive and aerospace suppliers who are using state-level grant, loan, and reimbursement programs successfully to overcome financial gaps and other obstacles to investing in new equipment, adding space or new facilities, and creating jobs.
Both the automotive and aerospace manufacturing industries have high-tech and capital-intensive operations, requiring highly skilled and specialized labor. Indeed, many of the required inputs, materials, and production processes are common among OEMs and suppliers across both industries. For example, Ford and Boeing have a longstanding collaborative relationship, sharing research and knowledge in the development of new production processes. The Ford Freeform Fabrication Technology initiative, a new method of constructing low-volume and prototype parts, is a recent example. The automotive and aerospace industries also share many government-mandated and consumer-driven challenges that are heavily impacting OEMs and their largest suppliers and, consequently, being forced down through supply chains (see Chart 1).
Most states have business assistance programs to help companies overcome financial gaps and other obstacles to investing in new equipment, adding space or new facilities, and creating jobs. This article discusses some common problems faced by small and mid-size manufacturing companies, describes select programs that may be used to resolve these issues, and provides illustrative examples of automotive and aerospace suppliers that used these programs to improve and expand their businesses. Of course, these challenges do not solely exist within the automotive and aerospace supplier industries, and this article will be of interest to any company developing strategies to overcome these and similar obstacles.
Finally, since both industries require frequent capital investments, this article focuses on grant, financing, and reimbursement programs that provide up-front or early-stage assistance; thus, tax credits, tax abatements, tax-free bond programs, and tax increment financing arrangements are omitted. While such programs are helpful, their benefits accrue slowly, over a number of years. Also, they are already among the best-known and most-used programs.
Up-Front Assistance vs. Reimbursements
Broadly speaking, business assistance programs may be divided between those that provide cash or loans and others that provide reimbursement for qualified incurred costs. The first group includes grants and deal-closing funds (often structured as performance-based, forgivable loans), collateral support and loan participation programs, direct loans, subsidized loans, and loan guarantees.
Typical reimbursement programs include training grants and energy-efficiency rebates. Training grants are readily available and reimbursements can be received a few weeks after pre-approved training expenses are incurred. Energy-efficiency rebates have been somewhat underutilized. They will remain available for at least the next two years under a federally mandated program that may vary from one state or utility to another. Lighting and electrical retrofits (or in the case of new construction, upgrades beyond current building code requirements) have a quick payback period when rebates are factored in. Less common, more complex energy-saving measures (production process improvements, for example) can be included under customized incentives.
Business Development and Closing Fund Grants
Many states have business development programs that provide grants, loans, and other economic assistance to help companies close financial gaps and move forward with investment and job creation plans. Sometimes called “deal-closing funds,” they can also be used to help win competitive projects.
A Michigan company that designs and manufactures parts and tooling for the aerospace and automotive industries was “on the ropes” in 2009. The company recently won substantial new work. Retaining its original building, the company leased two nearby buildings and spent almost $3 million in repairs and upfitting. It will invest more than $6.5 million for machinery and equipment for the new buildings. The tipping point in making the project feasible was an $800,000 performance-based grant from the Michigan Business Development Program. The result was a commitment of almost $10 million in private investment and 188 new jobs (tripling the current work force).
In 2012, South Carolina awarded $6.2 million from the Governor’s Closing Fund to 18 projects throughout the state. One of the deals was an $825,000 grant for building upfit, site preparation, and infrastructure for a plastic automotive components maker, which then committed to establish its new facility in South Carolina with an investment of $12 million and 119 new jobs. In June 2013, the fund awarded $300,000 for building upfit to entice a maker of tubing for aircraft fueling systems to relocate its operations to the state. Private investment is projected to be $5.5 million, with 100 new jobs.
The Use of Collateral Support Programs
To facilitate growth, a 250-employee aluminum die casting company serving the automotive and heavy truck industries needed to refinance existing debt and increase its working capital line of credit. A new lender committed to the refinancing, subject to collateral support for the increased working capital line through a state-administered, federally funded program known as the State Small Business Credit Initiative (SSBCI). The state pledged $2.4 million for collateral support, enabling the new lender to refinance $8.5 million of existing debt. This resulted in a project with total private investment of nearly $13 million and the creation of 88 jobs.
An automotive stamping supplier, producing medium-sized components, as well as a larger, more complex Class “A” stampings and assemblies operation, needed new equipment to increase capacity and improve efficiency. The total cost was $7.5 million. The total financing package was made possible by $3.7 million in SSBCI-funded collateral support. The new equipment will enable the company to add 45 new jobs.Both examples above are from Michigan, which created new state programs for collateral support and loan participation in 2009 and then persuaded the federal government to establish a nationwide program built on the Michigan model. The Small Business Jobs Act of 2010 created the State Small Business Credit Initiative (SSBCI), with $1.5 billion in direct funding to states for programs that expand access to credit for small business (fewer than 500 employees for Capital Access Program loans, and fewer than 750 for all other programs). States leverage private lending with federal funds to help finance small businesses and manufacturers that are creditworthy, but unable to get the loans they need to expand and create jobs.
While SSBCI is a one-time federal grant to the states, each state’s loan repayments will remain the property of that state in perpetuity. “Recaptured” monies can be used as revolving funds for state-operated business credit programs over the long-term. Automotive and aerospace suppliers with fewer than 750 employees under the same ownership should take a look at SSBCI if they have any issues with access to credit. Under SSBCI, states can undertake all or part of the permitted activities. They can also tailor and name their funds. (Tennessee calls theirs “INCITE Fund.”) The basic funding types are described in Chart 2.
Training grants provide financial support to businesses that are creating jobs and need to recruit and train new employees or increase skills in their existing work force. There are multiple sources for grant-funded training. Find contacts for federally funded programs in each state at American Job Centers. Institutions of higher education, especially community colleges, frequently have direct sources of funding for training they provide.
Called “Alabama’s Number One Incentive,” AIDT is a notable example of a comprehensive state initiative to recruit, screen, and train workers for expanding businesses, usually at no cost to the business. AIDT is affiliated with several training centers, including one focused on robotics. Most states have one or more training centers that are focused on targeted industries like automotive and aeronautics, or a broader priority like robotics, and provide hands-on training, classroom training, and other business services.
Many companies have not yet taken advantage of energy-efficiency rebates, which will be available through 2015, or perhaps longer. “Green” projects can improve competitiveness and business sustainability by reducing ongoing costs. The immense savings (at current energy costs) can be sufficient to offset the entire project cost within a few years’ time, even absent rebates or business assistance programs. While lighting is relatively inexpensive and has a quick payback, building envelope, HVAC, and process improvements often have large up-front costs, and without the ability to fund these, the benefits cannot be realized. To address this problem, several programs exist to enable businesses to carry out energy-efficiency projects. A Kentucky facility had a free lighting audit, arranged by its electric provider. To upgrade 660 fixtures was $167,000 and would result in an annual savings of $50,000. There would also be a reduction of maintenance costs and tax deductions. With a $30,000 rebate, the payback period was reduced to about 2.75 years. A heavy manufacturing facility in another state would benefit greatly from infrastructure improvements, but the cost was several hundred thousand dollars. Payback through energy savings was about five years. Rebates cut payback to less than four years. If needed (and if the company qualified), project financing was available to purchase and install upgrades with no out-of-pocket costs; the contractor/lender would be repaid by splitting the energy savings for six to seven years.
While a number of business assistance programs are available in most areas, many companies fail to utilize them, often because they are simply unaware of them. Also, many companies are hard-pressed to find the time to track down which assistance programs they qualify for, and navigating the bureaucratic processes and requirements of each program can seem daunting. When a company is challenged by financial, technological, work force, equipment, or facility needs (among others), help should be sought from:
- Local and state economic developers;
- Small Business Development Centers/Small Business Technology & Development Centers;
- Local agencies delivering work force development and training services under the auspices of the Workforce Investment Act; and Business development and site selection/incentives procurement consultants.
Business assistance programs exist beyond the well-known tax abatements and tax credits. While the examples in this article focused on automotive and aerospace companies, these and similar programs are available to most businesses. These lesser-known and often underutilized resources may provide essential aid to businesses looking to expand their operations, upgrade their production processes and technologies, or improve efficiency and sustainability.
Authors: David B. Munson, Program Development Associate, Center for Automotive Research and Michael Schultz, Industry Analyst, Center for Automotive Research (2013 Auto/Aero Site Guide). From Area Development Site and Facility Planning.
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