Small Business Administration (SBA) 504 loan programs encourage small business investments

Even in good economic times, access to capital is often a concern for small businesses. And in a challenging economic climate many small business owners assume they won't be able to obtain the financing they need to expand their businesses. But, for small businesses with good fundamentals, credit is available. Small business growth is a bright spot in the current economic picture. According to statistics from the National Federation of Independent Business, small businesses create more than 60% of new jobs nationally. ADP's National Employment report showed that while companies with more than 500 employees lost 52,000 jobs from February to March, small businesses, with fewer than 50 employees, added 55,000 jobs. One lending program that works for many small businesses is a relatively little known U.S. Small Business Administration (SBA) loan program that helps companies purchase land, buildings, equipment and machinery without depleting working capital. The SBA 504 loan program, which was introduced in the 1980s when double-digit interest rates made conventional loans difficult for small businesses to afford, has been gaining popularity because it allows business owners to make significant investments in their businesses, benefits communities by encouraging job development and limits the lender's risk. How the SBA 504 loan program works is that it brings together two lenders, sharing the risk. These loans are a partnership between a commercial lender and a certified development corporation (CDC), which are nonprofit lending consortiums with the mission of encouraging economic development and supporting job development. SBA 504 loans fulfill the CDC's economic development mission by requiring that the borrower must create or retain one job per $50,000 in CDC funds lent. Using the program, qualified small businesses can obtain up to a range of $1.5 million to $4 million, depending on the industry, in long-term, fixed rate financing that can require as little as 10% down and does not end in a balloon payment. The funds can be used to purchase, build or renovate owner-occupied business property, or purchase machinery and equipment. 504 loans cannot be used to provide working capital. In a SBA 504 loan deal, the commercial lender, often a bank, lends 50% of the funds and takes a first mortgage or lien, significantly reducing its risk in making the loan. The CDC partner lends 40% of the loan funds, taking a second mortgage or lien, and the borrower generally only has to put in 10% of the loan value, keeping more capital available in the business than would be possible with a standard, conventional loan. Start-up companies and companies in some industries may be required to contribute additional equity. Among the SBA 504 program benefits are the loan's fixed rate terms of 10 years for equipment and 20 years for real estate. By comparison, many traditional small business loans require 20 to 25% down and have terms of 10 to 15 years for real estate, ending in a balloon payment. The SBA 504 program gained popularity during the booming real estate market - now strictly in the rearview mirror - as borrowers looked for a way to reduce down payments and lenders recognized the value of sharing the risk with a CDC partner. While still producing only half the dollar volume of the SBA's 7a loan program ($6.3 billion in 504 loans vs. $13.5 billion in 7a loans in 2007), 504 loans offer an alternative for small businesses that see upside opportunities even in a down economy. For small business owners who have a solid plan to grow through the purchase of property or equipment, the SBA 504 loan program can be the right tool to get the deal done. Patrick Mucci is a SBA relationship manager at KeyBank, Albany, N.Y.