The Disparity Between Appraisal Values and Construction Costs Creates Hurdles for Small Companies in Rural America
Introduction
Imagine launching a small business in rural America, only to realize that the very land you hope to expand on is working against you. That’s the reality Amber Lambke faced when she tried to grow her company, Maine Grains, in the rural town of Skowhegan, Maine. The catch-22 here? An appraisal gap that highlights a pressing financial concern for small businesses in rural areas—a dilemma compounded by issues like bad credit and limited access to small business loans.
The Appraisal Gap Dilemma
Lambke planned to construct a new building next to her existing facility at an estimated construction cost of $7.4 million. However, an appraiser hired by a local bank valued the completed project at a mere $2.4 million. “The proposed development is not financially feasible,” stated the appraiser in a comprehensive report. The property’s best use, according to the appraiser, would be to hold it for future prospects. Such disparities between appraisal values and construction costs are an unsecured bridge that small companies often find broken when considering expansion.
Why This Matters in Rural Economies
Skowhegan is a microcosm of many rural communities struggling with the same issues—low property values and decades of disinvestment. Businesses employing fewer than 50 people are the backbone of rural economies, providing 42% of jobs compared to 28% in urban areas. But these small companies face challenges like bad credit, limited access to small business loans, and the increasing complexity of invoicing and factoring in an economy where big tech holds the upper hand.
Other Financing Options: Are They Feasible?
In such scenarios, short-term business loans and business lines of credit might appear as alternative solutions. However, most small businesses in rural areas face hurdles in securing even unsecured loans due to the lack of collateral. Ines Polonius, CEO of Communities Unlimited, noted, “The lack of collateral is the number one barrier to any rural business.”
The Rising Costs of Doing Business
Anne Ball, a program director at Maine Development Foundation, added that inflation and rising labor costs are making the problem worse. These macroeconomic pressures make options like short-term business loans less viable and emphasize the need for more flexible solutions like factoring.
A Lack of Comparable Sales
Low appraisals are partially due to the lack of recent comparable sales, both residential and commercial. This makes it challenging for entrepreneurs to use home equity as a form of startup financing, another obstacle in a long line of financial hurdles facing rural businesses.
State and Federal Aid: A Ray of Hope
Some entrepreneurs have leveraged state and federal tax credits to give life to old structures, which in turn boosts local economies. Yet, this doesn’t solve the problem for new projects like Lambke’s, leaving small companies in a perpetual hunt for alternative financing options.
The Future of Rural Business Financing
Lambke’s continued search for funding, including grant applications, represents the tenacity required to thrive in today’s difficult rural business environment. This brings us to an urgent question: How can financial institutions, local governments, and communities address these issues to facilitate rural economic development?
Conclusion
The widening gap between appraisal values and construction costs is more than just a math problem. It’s a complex financial obstacle course, exacerbated by issues like bad credit and limited access to small business loans, that small businesses in rural America must navigate. Addressing this disparity is crucial for the economic development and sustainability of these communities.