Funding Growth Projects Doug Devereaux Clara Asmail NIST MEP Presentation to INEAP April 25,

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. 2

Key “Demand” Findings on Capital Needs of Small Manufacturers Common Small Manufacturer Capital Needs* 1.New Construction 2.Expansion, Land or Building Acquisition 3.Facility Improvements and Remodeling 4. Leasehold Improvements 5. Machinery and Equipment 6.Research and Development, Innovation 7.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 3

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 Barriers and Gaps 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 banks SMEs may be able to access additional financing that is offered to businesses in particular states or regions Manufacturers and lenders may avoid federal/state programs due to paperwork and program requirements Navigating federal programs to find applicable sources is a significant challenge expressed by all stakeholders Companies may have difficulty qualifying for financing due to tighter lending standards and low risk tolerance Accessibility Weaknesses 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 options Companies may not know how to approach lenders/investors and prepare financial documentation Lenders may not fully understand how to evaluate risk due to limited understanding of manufacturing sector Weaknesses Intermediary lenders of all types may be underutilizing the guarantees available through government programs Capital 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 staff Less than 20 federal programs target small manufacturers Private equity funds that invest in manufacturers, especially in rural areas, are in short supply Availability and Applicability Weaknesses 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 Strengths Awareness Strengths 5

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 6

Prototype of Capital Sources Inventory Identified diversity of capital sources (500+), federal/state/private/equity… 7

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“MoneyTech” project premises Supply 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. 9

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 10

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. 11

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