Don’t Overlook SBA 504 Loan Program

With all the bailout headlines and bad economic news, one bright spot of opportunity for small businesses has often been overlooked. I’m speaking about the U.S. Small Business Administration 504 Loan Program that offers small businesses up to 90 percent long term fixed rate financing for the purchase, improvement and construction of commercial or industrial real estate for their own business use and, in certain cases, long term equipment. The 504 program has not been cut or frozen. In fact, the U.S. Dept. of Treasury has earmarked $7.5 billion in funding for the program in the current fiscal year, and the Stimulus Package just passed has added some additional incentives for the 504 borrower. While it is true that the secondary markets are still proving a challenge for banks who sell their loans to other institutions, the banks that provide loans from their own capital have not been impacted in the same way, and they continue to be active in lending under the SBA 504 program. In fact, last year even as the credit crisis was impacting many sectors of banking, a total of $13.7 billion in projects was financed through the SBA 504 loan program nationally. When talking about SBA financing, there is sometimes confusion because the SBA offers two major loan programs: the SBA 504 program and the SBA 7(a) program, a financing tool that can be used for general purpose needs like working capital and business acquisitions. But it isn’t just the purpose of the SBA 504 loan that is different. They also work very differently. Under the 504 program, a participating bank partners with the SBA represented by a non-profit economic development organization called a Certified Development Company. Two loans are provided at the same time: the bank provides a 1st deed of trust loan for typically 50 percent of the project total; the SBA through the CDC provides a 2nd trust deed for up to 40 percent; and the small business comes in with a 10 percent down payment. Banks like the 504 program because that 2nd trust deed loan offers them a way to mitigate risk and allows them to lend on larger projects. A 7 (a) loan is offered directly by a participating bank with a portion of the loan guaranteed by the SBA. One important difference for the borrower is that the 7(a) loan is typically offered with an interest rate that is either variable or fixed for a shorter term (e.g. 3 or 5 years) whereas the 504 loan is fixed and fully amortizing over a 20-year or a 10-year term. SBA 504 financing can be used to finance projects ranging up to $10 million whereas the maximum on a 7(a) project is generally $2.0 million. Another advantage to borrowers is that the 504 program offers the ability to acquire the real estate they need to operate their business while preserving working capital for other business needs. Business owners can borrow not just for the purchase of the real estate, but also to finance the cost of improvements to adapt the property to their business on the same long-term basis. Conventional bank financing typically requires a much higher down payment than SBA 504 financing typically 25-30% versus 10% allowed by the SBA 504 program and improvements are usually financed separately from the real estate and over a shorter period of time. This can translate into a higher monthly payment in the conventional financing scenario. The American Recovery and Reinvestment Act of 2009 or Stimulus Act that was just signed by President Obama in February has brought some additional incentives for borrowers including temporary fee reductions on SBA 504 loans. The 2nd trust deed loan origination fee of 2.15 percent is being reduced to 0.65 percent until September, 2010 or until the approximately $72 million that has been allocated for the fee reduction is used up. So it’s first come, first served, and the SBA is estimating that the fee reduction dollars will be consumed by the end of this year. The Stimulus Act also includes an allocation of $15 billion to be used for restarting the secondary market. But where the 504 program is concerned, the banks that loan off their balance sheets (usually, but not always larger banks) have continued 504 lending through the current credit crunch anyway. And the good news is we can fully expect them to continue to do so. Sasha Globa, a former CPA, is Senior Executive Vice President and Co-Managing Director of California Statewide Certified Development Corporation, a non-profit organization and Premier Certified Lender under the SBA 504 Loan Program. Working in partnership with leading private lenders, California Statewide has provided over $2 billion in project financing to small business enterprises throughout California. Correction There were two errors in the story “Institutions Large and Small are Eliminating SBA Lending” in the March 16 issue. Bank of America has not exited the SBA program. “Bank of America is still active in the SBA 7(a) and 504 loan programs,” said a spokesperson. In 2008, B of A made 88 loans with a total value of $2.9 million in the greater San Fernando Valley region, placing it at number 25 on the Business Journal list of Largest SBA lenders. Americas United Bank said that at no time have they placed the SBA 7(a) program on hold. “While our loan volume has declined along with those of most other banks in the program we are clearly still in the SBA business,” said President Gil Dalmau. In 2008, Americas United made four loans with a total value of $2.6 million in the San Fernando Valley region, placing it at number 28 on the Journal’s Largest SBA lenders list. Dalmau also pointed out that the statistics used in the development of that list only reflect lending in the San Fernando Valley and he said that the bank has done a significant amount of lending in other SBA districts. As a further point of clarification, statistics and comments in the article specifically referenced just the SBA 7(a) loan program, not the SBA 504 real estate loan program.