When John Billings wanted to expand his business a few years ago, he began looking for a lending partner.
The loan he found for his Springfield cabinet business, Billings & Associates Fine Woodworking LLC, was from an unlikely source: the state of Missouri.
Billings borrowed more than $700,000 through two loans from the state's Linked Deposit loan program. He used the money to construct a new facility and purchase more computerized equipment for his 10-employee company.
The program allows the state to make deposits that are linked to loans approved by individual state banks. Qualified borrowers receive loans at 2 percent to 3 percent below the market average interest rate. For instance, Billings said his 2007 loan rate was 4.7 percent when most banks were offering him loans above 6 percent.
"It's afforded us the ability, because of the lower interest rate, to do a lot more building than we had originally planned on," Billings said. "It's a no-brainer for a businessman."
Spreading the word
Even so, the state has had trouble getting people to sign on to the program. Only about $200 million is currently loaned out from the $720 million available by state statute.
State Treasurer Clint Zweifel is working to change that.
Passage this year of House Bill 883, aka Invest in Missouri legislation, opens up the program to more businesses and streamlines the process, Zweifel said. He's traveling the state to tell lenders and business owners.
Beginning Aug. 28, the program will expand to cover businesses that employ up to 100, up from a limit of 25 employees. Loan limits of $50,000 per employee also will increase to include the costs of capital outlay, physical expansion and renovation.
During his July 21 visit to Springfield, which included stops at Great Southern Bank and Springfield Business Journal, Zweifel touted what he calls an overhaul of the program.
"One of the great things about this program is that it doesn't depend on the state to act like a bank," Zweifel said. "We depend on the banking institution to ... make the decisions from a banking perspective. From an economic development perspective, we say it makes sense to lower those borrowing costs and let the business owner reinvest that money back into the business."
Bill Vaughn, president of Bank of Urbana, said his bank has six Linked Deposit loans on the books at branches in Urbana and Buffalo.
"The ability to obtain a low-cost deposit so we can pass on the low rate to qualifying business or farms is our sole motivation for doing it," he said, noting that while the state does not guarantee the loans, the credit-risk decision lies with the individual banks. "It's a pretty good deal."
Bankers balked
Overall, however, banks so far haven't been eager to jump on board. As of December, fewer than 200 bank branches, including just 16 in the Springfield metropolitan statistical area, participated in the program, according to the treasurer's office.
Billings, who heard about the program from a Realtor, said he had difficulty finding a bank that was willing to handle the process.
"We ran into an issue where the banks weren't interested in doing the paperwork," he said, adding that he found a lender in Regions Bank.
Vaughn, however, said he didn't think the loan program's requirements were onerous for banks to handle. The bank gets interest from the loans in addition to boosting its own deposit totals.
"Yes, there is a report due once a year and there are a couple of things we have to do, but we don't consider it a barrier to participating," he said.
Zweifel hopes the new legislation, which includes methods to streamline the application process and reduce wait times, will encourage more banks to join.
"They're the consumer's first door to the lending opportunity," Zweifel said of the banks. "We're going to be doing some marketing directly to consumers. But I think a large percentage of the program is dependent on the lenders spreading the word."
Even the process of working on legislation about the loan program seems to be helping make the public more aware of the program. The state approved $6.6 million in Linked Deposit loans in June, up from $1.3 million in April, according to the treasurer's office.
Zweifel hopes the program can act as a catalyst for a slumping economy.
"By no means is this going to be a game changer by itself, but it creates an infrastructure that allows you to reinvest more money in your business," he said. "That's the innovation that is going to move us forward long-term."
Returns on short-term deposits
The legislature also changed the state's Timed Deposit program, which allows the treasurer's office to make short-term deposits in Missouri banks.
The current program caps returns at the Treasury bonds rate, which State Treasurer Clint Zweifel said is usually 1 percent or more below the market rate. The result: a loss in returns on taxpayer money of $15 million a year.
"Banks would come to us and say they wanted to give us 2 percent, and we'd say, 'Thanks, but no thanks. We can only take the Treasury yield,'" Zweifel said. "It went against every free-market principle."
Starting Aug. 28, deposits of more than $7 million in any bank can earn the market rate of return, determined by a survey of similar investments at well-capitalized financial institutions. That $7 million figure will be reduced each year until it hits zero in 2014.
"We were investing money for decades and getting essentially zero return - less than zero if you look at inflation," Zweifel said. "For the first time in decades, the state is in a position where we get a market rate of return, and we have a chance to really grow this program."
