After a major customer moved a supply contract to a Chinese company, a Muskegon-area manufacturer needed capital to retool for the new business coming in to replace what it had lost.
Troy-based specialty lender Crestmark Bank first refinanced the company’s existing debt with another bank, and then worked with a capital fund the state created in 2012 to provide additional financing for growth.
The company, which later regained the lost contract because of quality issues with the Chinese supplier, has since paid off the debt to both Crestmark and GROW Michigan LLC.
“They had a game plan but they needed time to right-size themselves,” said Martin Blake, executive vice president of marketing for banks and financial organizations manager for Crestmark Bank.
Blake cites the company’s story as a successful example of how GROW Michigan works with banks across the state for businesses that need funding but have difficulty accessing growth capital.
Since forming in 2012, GROW Michigan has provided $51.1 million in mezzanine financing to nearly 30 companies that were able to leverage it with $280 million in senior bank debt to facilitate growth and create nearly 3,000 jobs. The Michigan Strategic Fund recently renewed GROW Michigan for two years with a $10 million commitment.
The fund represents a unique public-private partnership that came together as Michigan began emerging from its severe economic downturn to fill a gap in the capital continuum in the state at the lower end of the market.
“It brings another product to the market that has been sorely missed at the lower middle-market size,” Blake said. “What that allows you to do is provide more value, in combination with GROW Michigan, to a business customer who is trying to adjust their capital needs. Often you get into these smaller companies where they have a great idea or a great opportunity, but they need capital in order to execute on it.”
The Michigan Strategic Fund created GROW Michigan in partnership with 19 banks to provide growth capital to businesses in unique circumstances.
GROW Michigan can enter a deal to offer what’s needed beyond the amount a company’s senior lender will provide. A typical deal for GROW Michigan involves a borrower that has landed a major contract or has an opportunity to grow and needs to quickly expand capacity, but may lack adequate collateral or existing cash flow required for the bank loan it needs.
While that kind of funding is available in Michigan for larger companies, it’s generally lacking for small businesses that need less than $5 million in capital, GROW Michigan CEO Patrick O’Keefe said.
“For small businesses, it’s capital that’s typically not available to them in the marketplace,” O’Keefe told MiBiz. “We’re all about jobs here in the state and trying to figure out how to grow our state’s economy. This tool has a proven track record of attracting capital to grow the businesses and increase jobs.”
O’Keefe cites two “chicken and egg” scenarios that GROW Michigan was designed to solve.
In one instance, a borrower landed two major contracts and needed to build out two new production lines. Based on the company’s current performance, however, the owner did not qualify for additional debt from his bank, which then worked with GROW Michigan on a deal.
In another example, GROW Michigan is working with a company in Oakland County that has the opportunity to rapidly grow from $2 million in revenue to $100 million and add 100 new jobs, but needs growth capital beyond what its bank will provide to finance expansion.
“The company really doesn’t have the track record yet for the bank to feel comfortable,” O’Keefe said. “The kind of capital we have is really there to seed these opportunities. We can take that calculated risk. We can buy into the dream a little bit.”
GROW Michigan loans are typically for small businesses with revenue of $3 million to $50 million that have positive EBITDA, strong management, an established relationship with a senior lender, and the potential to grow jobs. Loans usually run from $500,000 to $3 million.
The Michigan Strategic Fund’s December renewal of GROW Michigan is one of two possible extensions. The state can do another renewal that will take the fund to 2023, O’Keefe said.
The December renewal came after GROW Michigan went “on hold” for five months in late 2017 amid management changes, the development of new policies and procedures, and a plan to actively reach out to banks across the state that provide client referrals.
Of the 30 companies GROW Michigan has funded, 13 paid off their debt in full and 14 remain active in the lending portfolio. The other three have “had some hiccups along the way,” O’Keefe said, “but we’ve had pretty good recoveries even in those situations.”
“We haven’t really had a loss yet,” he said.
GROW Michigan presently has a “pretty strong pipeline” of 11 possible deals, O’Keefe added.
GROW Michigan participants
The Michigan Strategic Fund formed GROW Michigan in 2012 in partnership with a number of banks across the state. Here are the banks that are invested in the fund:
- Chemical Bank
- Crestmark Bank
- Fifth Third Bank
- First National Bank of Michigan
- Flagstar Bank
- Hastings City Bank
- Huntington Bank
- Independent Bank
- Level One Bank
- Mercantile Bank
- Old National Bank
- OSB Community Bank
- PNC Bank
- The Private Bank