KENNETH J. SMITH
Bridging ‘gaps’

Massachusetts Business Development Corp. has been around for more than 50 years, begun by like-minded high-achievers to entice new business growth and therefore economic vitality to the commonwealth.

While that mission hasn’t changed, the products and services offered by the publicly traded company have broadened to fill the gaps that traditional lenders can’t bridge. MassBusiness President Kenneth J. Smith said the partnership between his company and the 35 to 40 lenders it does business with is crucial to upholding the healthy business atmosphere in the state.

“It’s kind of a theory that when the tide rises, all the boats float higher. Our job is to help businesses come into Massachusetts and help them grow,” said Smith.

Financial institutions and a few insurance companies contribute funds into a borrowable pool of money to MassBusiness which then, in turn, lends to businesses for a variety of reasons and acts as a coach of sorts to help the business flourish. A publicly held stock company, MassBusiness pays its administrative costs through the use of a small yield it makes on the loans.

MassBusiness loans are offered for a variety of purposes, ranging from working capital, machinery and equipment to real estate acquisition, renovation and construction. Many of its offerings are government-guaranteed loans. Additionally, MassBusiness recently decided to begin offering investment real estate loans.

“We’ve always been involved in owner-occupied [loans] but we see a real need out there for people who want to build and then lease [space] out to a growing company,” said Smith.

Traditional banks often are able to fund large projects – those requiring $5 million or more in financing – but have become less able to fund many smaller projects, such as a developer seeking $500,000, for example. “There’s a lower-end piece of that market that needs financing, so we’re just launching now lending programs to serve that market,” Smith said. However, MassBusiness isn’t interested in speculative projects, only those for which the landlord has an occupant ready to sign the lease.

MassBusiness discovered the financing need of small-project developers as part of its continual evaluation of the business community. “We take a look at what the banks are doing, we take a look at what the capital companies are doing and we try to ask ourselves, ‘Where is there a gap in the marketplace – where is there a company in need of funding that’s not able to get it?'” said Smith.

In its traditional role, MassBusiness might fill the funding gap for a businessman who needs $200,000 to start a laundromat. In all likelihood, said Smith, he might not find a venture capitalist willing to fund that small amount. But the underserved segments of the business community change each decade and MassBusiness keeps its finger on the pulse of the business community it serves through analysis of the 20 or so applications for products that come in each week.

In addition to the 250 loans it makes per year, MassBusiness invests in venture capital companies, as well. One product that’s particularly satisfying to Smith is the Brownfields Redevelopment Access to Capital program, founded a few years ago. The program provides insurance to developers willing to take on a polluted industrial site, clean it up and bring it back to productivity. Today, MassBusiness funds 60 to 70 such projects a year. Insurance protects against unexpectedly high levels of pollution that prove even more difficult and costly clean up.

Because it is required to become an expert on the many types of businesses to which it loans money, MassBusiness sees the loops of the economic cycles from a unique perspective. Its reliance on the cumulative experience of its board of directors and staff – Smith himself has been at the company for 19 years – keeps the company from “irrational exuberance,” said Smith, adopting the phraseology of Federal Reserve Chairman Alan Greenspan.

For instance, MassBusiness didn’t invest in the dot-com business during that sector’s boom period. “We didn’t play,” said Smith. “We try to play in areas we know something about and we just didn’t know that area,” he said.

“It was just way too competitive,” said Elizabeth C. Trifone, president of the Massachusetts Certified Development Corp., an affiliate of MassBusiness. “We knew there was going to be a fallout [in the dot-com sector] eventually.” The subsequent crash of the dot-coms showed MassBusiness’ policy to be a wise one.

‘Entrepreneurial Spirit’

But what keeps MassBusiness safe is its application of time-honored business practices to any company at which it looks. “We always say around here [that] management, cash flow and collateral are our primary considerations in any project, the biggest one being management,” said Smith.

Not that MassBusiness isn’t willing to take on risk. In the trendy pharmaceutical industry, which is slowly reaching the “bubble” stage much as the dot-coms once did, MassBusiness has invested in a company developing a faster way to dissect worms for scientists. “We could understand that,” said Smith. “So we’ll play in that space – but we have to be able to get our arms around it [the company’s business plan and products].”

“Like anything else, you tend to diversify,” said Trifone.

Carol Cedrone Brennan, director of business development for MassBusiness, sees another trend: spinoffs. Fortune 500 companies are spinning-off divisions that then stand as separate entities.

In addition to the trends in types of businesses, Trifone said she’s seeing a change in business people as well. “Businesses are definitely getting more sophisticated, at least in what we’re seeing with management,” she said. In order to stay competitive, businesses have to synthesize a much larger volume of information on a daily basis, whether it’s the new product line of the competition, credit lines or online transfers of money.

The sophisticated nature of business people and the mild recession has resulted in dropping sales but not the devastating loss of business experienced in the recession of the early 1990s, said Trifone. “You don’t see people just running to the bankruptcy court,” she said. Instead, they’re weathering the downtime very well.

“Being a big college town, there is an underlying entrepreneurial spirit here [in Boston] that is unlike anything else in the country,” said Smith. “What we do here [at MassBusiness] directly plays into that.”