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The Path Less Taken for Landing Loans

Borrowers find money in offbeat placesWhen Rajbhog Foods outgrew its Queens, New York, plant in June 2004, the family-owned company decided to build a $3.7 million facility in Jersey City. Part of the impetus came from Rajbhog’s ability to slash borrowing costs by floating a bond through the New Jersey Economic Development Authority (NJEDA) instead of using bank financing. While many companies are landing good deals at neighborhood lenders, other small borrowers are turning to nontraditional sources of funds.

In September EDA issued a $2.2 million, 15-year bond paying 4.28% interest on behalf of Rajbhog Foods. “We saved from 2% to 3% on the interest rate by working with the EDA,” says Sanjiv Mody, vice president of Rajbhog, which makes Indian sweets, ice cream, frozen dinners and other foods. “We’re renovating the existing 35,000-sq.-ft. building and expect to employ about 35 people there” when work is completed in March.

The EDA was able to offer the below-market bond rate because the interest is free of state and federal taxes. “The EDA’s qualified small-issue bond program meets certain federal tax-code requirements that lets smaller companies raise funds through tax-free bonds, even though they might otherwise not be big enough to float a bond on their own,” says Bernard S. Davis, a partner in charge at the Newark office of the law firm St. John & Wayne. “However, a company must meet certain conditions to be eligible for the program,” says Davis, who helped arranged the Rajbhog Foods deal.

For example, a company usually must be a manufacturer to be eligible to issue a tax-exempt bond. And there may be restrictions on the kind of facilities that may be financed by the bond, such as how much nonmanufacturing space the funded building may have.

EDA bonds are hardly the only nontraditional way to raise money. So-called mezzanine debt can come at rates as high as 15% or 20% for customers who need a short-term loan that they can quickly repay or refinance at lower cost. Georgine Laffey used such financing in 2002 when she needed $800,000 to buy the Copper Springs Beach & Tennis Club in Gillette, which was badly in need of refurbishing.

Unable to get a bank loan, Laffey tried Palisades Financial, an Englewood Cliffs investment banking firm that her real estate banker husband had previously done business with. “I went to a lot of banks, but they just couldn’t understand my business,” she says. “Palisades financial loaned the money and then a year later, as our membership grew, helped us to refinance the debt at a lower rate at a bank.” Laffey went on to finance $1.2 million of upgrades using cash generated by new memberships.

“We’re able to fill in the blanks between what the borrower needs and what a bank’s willing to lend,” says Mark W. Zurlini, president of Palisades Financial. “Right now we’re involved in constructing a mixed-use building in [New York City’s] Little Italy. It’ll be a restaurant that will have condo units above the dining facilities.”

In Hackensack, 17-year-old Kennedy Funding specializes in deals that banks reject. Earlier this month the company provided $6.82 million secured by an undeveloped lot for the expansion of a Houston, Texas, night club. Jeffrey Wolfer, president and co-CEO of Kennedy Funding, says Houston bankers wouldn’t accept the raw land as collateral and turned down the loan request. “We understand assets and we understand business,” says Wolfer. “We saw the value in the project and were willing to lend against it.”

Nontraditional Financing

Why a business might need it

Some banks reject loan requests that don’t fit traditional models.

Who offers it

State agencies, private investment firms and consumer and commercial financing companies are among the main sources of nontraditional funds.

What’s good about it

Nontraditional financing can be a lifeline when banks turn down loan requests and can sometimes be less expensive than regular loans.

What’s bad about it

Some nontraditional funds carry double-digit interest rates.

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