Whether it’s changing customer demands, compliance with new government regulations, intense competition, or technological advancements, today’s market pressures call for constant change within an organization.
Many market pressures require companies to make investments; if not now, in the very near future. Accordingly, access to capital is critical.
Yet given the overall constrained market liquidity, there are fewer borrowing options than ever before, and investor scrutiny of potential investments has increased.
Perhaps nowhere has the need to respond to market pressures and invest in change been more critical than in the food and beverage industry. Business has been experiencing continued growth in areas such as packaged food products, organic foods, and specialty beverages. This growth has accelerated the need for capital to fund expansions and improvements. According to the United States Department of Agriculture (USDA), while the food and beverage industry has seen steady growth of its US retail sales, developing nations are creating a rapidly growing demand for US food product exports as a large number of these populations are growing in affluence. This combined growth has created new pressures in the production of food and beverage products at many companies’ existing US facilities.
Developing new expansion projects has additional implications that trigger several operational and environmental concerns. Today’s air, water and solids effluents management standards by the Environmental Protection Agency (EPA) and state natural resource agencies have become more stringent by the day. More growth means more waste to manage. Often a processing facility’s growth can be limited by its ability to consistently manage its waste streams.
Compounding the matter are elements external to operations that affect a processor’s ability to effectively manage its waste streams, namely the municipal treatment facilities that food and beverage companies rely on. Many treatment plants are already at their prescribed federal and state limits for daily phosphorus, Biological Oxygen Demand, and nitrogen levels, resulting in excess surcharges to processors. What’s more, scores of municipalities have aging infrastructures, with many built 50 years ago. According to a 2009 "U.S. Conference of Mayors Metropolitan Infrastructure Sustainability Study" prepared by GlobeScan and sponsored by Siemens Corporation, three in five cities (59%) identify the lack of funding to meet infrastructure needs as a serious challenge.
Processors aren’t likely to see a municipal remedy any time in the near future, if at all. Many municipalities are unwilling and unable to take on debt, particularly given the current economy and the sentiments of already burdened taxpayers. Most municipalities also fear the consequences of incurring debt in order to accommodate a single, major industrial customer only to risk bankruptcy should that customer leave town or shutter its doors—a scenario that’s playing out in many parts of the country.
Add to this the pressures to comply with upcoming EPA or state requirements on CO2 emissions and it’s easy to see why food and beverage organizations are feeling unusually challenged. For processors, addressing the byproduct issue with initiatives to treat their own waste streams isn’t considered the best use of capital in today’s climate. Investing and expanding the scope of non-core operations is an uncomfortable proposition for management—the move doesn’t typically support sufficient returns to warrant such an investment. This leaves few options for the producer to effectively grow in size or expand product diversity while remaining competitive.
Nevertheless, the ultimate responsibility of managing these waste streams still falls to the processors. The fact is, the cost of growth must consider the full cost of handling the waste streams inherent in additional production.
There is a way to fund an expansion or improvement project and reduce the amount of cash needed. To do so, companies must consider a full range of nontraditional financing opportunities.
The new mix of nontraditional financing
Tax credits and other government incentives are underutilized avenues to new capital needed for increasing market share and maintaining a competitive edge. They can lower a company’s financing costs, increase investment returns, and enhance cash flow.
Numerous incentives are available to encourage capital infusions and investments in a business, at various stages in the business cycle. Tax credits like the New Markets Tax Credits (NMTC) can present the ideal approach for taking an expansion project off the shelf, subsidizing that investment, while also meeting environmental regulations, resourcefully. Enacted in 2000, the NMTC program encourages investment in economically distressed areas by offering a tax credit that when monetized, can sometimes result in a benefit of up to 20 percent of the total project cost.
Now’s the time
In the new economy, companies must take a comprehensive and nontraditional approach to capital. Tax credits and incentives can be the key in the overall equation, but timing is critical as some are due to expire or may undergo changes in benefits. By further creating a public/private collaboration, a company can develop an opportunity for expansion that also creates a competitive value proposition for the organization.
To make that financial strategy a reality requires an understanding of the various intricacies of credits and incentives, both at federal and state levels. It’s one thing to qualify for funding; securing it is entirely different. Be cognizant that other project development decisions you make can impact whether or not maximum tax credit benefits will be realized.
Applying for credits and incentives and optimizing their benefits is a process, to be sure. But the ability to bring growth plans to life at a significant cost reduction is more than worth the time and effort.
The new mix
Nontraditional financing is now playing a bigger role in turning shelved projects into reality. Today’s new mix of financing includes a host of other state and federal revenue sources. By maximizing tax and financial incentives in the mix, companies can lower capital and owner investment, allow for more successful outcomes, and provide an opportunity to expand a project without expending additional funds.
|Tax Credit Programs||Negotiated Incentives||Loan Programs|
|New Market Tax Credits (NMTC)||Discretionary grants||State and federal bonding programs|
|Energy related tax credits||Low-cost land or lease rates||Local economic development corporate loans|
|Tax investment financing||Employee training monies||Brownfield, environmental, small business, minority and other characteristic-based loans|
|Job creation or retention credits||Employee recruiting and screening assistance|
|Other targeted credits, e.g., enterprise zone||Infrastructure improvements (roads, parking lots, etc.)|
|Payroll (withholding) tax rebates||Access to technical resources|
|Sales tax refunds, e.g., construction materials||Utility rate reductions|
|Investment credits||Supplier financing|