Tax-Exempt Financing: A Solution in a High Interest Rate Environment

Against the backdrop of rising interest rates, organizations are looking for more cost-effective ways to finance new projects and foster growth. If you’re a nonprofit or small-to-medium sized manufacturer, there’s good news for you: tax-exempt financing offers savings through lower interest rates in the form of a bank purchased bond.

Whether you’re a manufacturer looking to expand your facility or purchase equipment, or a private school, social service agency, or other mission-oriented organization, bank purchased tax-exempt bonds can be your powerful ally. Read on to learn valuable information about this tax-advantaged way to get the financing you need to fund capital and other long-term job-creation projects. 

What are tax-exempt financing solutions?

For nonprofits and small to mid-sized manufacturers, the cost of capital can often put expansion visions out of reach. To level the playing field, the federal tax code provides incentives for creating new jobs through the expansion of their organization. What this means in terms of dollars and cents is that the interest income from these tax-exempt bonds is exempt to lenders, who then pass the benefit onto borrowers in the form of an interest rate that can be 15-25% lower than conventional loans. 

There are three parties in this transaction: the government entity that issues the bond, the bank that becomes the bond holder, and the borrower. The issuing government entity is simply a conduit to make the loan tax-exempt.

The government-issued bonds are typically five-year notes with 20-year amortization. What’s more, because the bond is bought privately by the bank, rather than being issued into the public market, there are no public security costs, which translates into further cost savings.

These financial solutions also require no federal guarantee or other credit support, and the servicing bank uses the same credit standards found in other loans when underwriting bond deals. And last, tax-exempt financing tools offer more flexibility for restructuring and, later modifying deals and covenants since they’re held only by the bank.

How much can I save with tax-exempt financing?

In the current high interest rate climate, the lower interest rates that come with tax-exempt financing can net your qualifying organization crucial savings compared to other financing options. With a lower interest rate, your manufacturing company is empowered to be more competitive, your nonprofit mission more fulfilled. 

So for example, when financing a $5 million construction project with a tax-exempt bond, you could reduce your annual debt service by over $60,000 and see present value savings of over $600,000. What can you do with these savings? You may put this money back into operations to support your business or mission. Or, the savings could enable you to finance a larger project; so rather than $5 million, you could seek financing for $5.5 million. In general, tax-exempt financing tools make sense for projects of $1 million or above.

Finance your organization’s growth with First American Bank

Tax-exempt financing can support your qualifying organization’s growth and competitive advantage. But to make the most of this financial solution, you need support from a committed partner.

First American Bank has over 30 years of experience helping organizations grow with tax-exempt financing tools; we specialize in the private purchase of bonds and hold them on our balance sheet. 

When partnering with us, you get a dedicated financial partner who can manage your entire loan financing process and maintain a close relationship along the way. Together with our team of specialized business lenders, we save you time and costs that you can invest into your organization’s growth and inspiring mission.