The U.S. Small Business Ad-ministration’s (SBA) loan pro¬grams have garnered much criti¬cism over the years. Some complaints may have been warranted in the past, but these days, the SBA is different.
Increased accountability and newly implemented efficiencies are a terrific development for U.S. taxpayers and for America’s small-business owners. As we see these changes, I think industry mem¬bers should work to remove the stigma that exists about certain SBA loans.
Many entrepreneurs — and far too many brokers, ironically — dismiss the SBA because of its more well-known 7(a) lending program. This program is most often in the news and nearly always seems to be in crisis or in need of supple¬mental appropriations. Whether or not the 7(a)’s reputation is deserved, its negative attention has managed to tarnish other effec¬tive and lesser-known SBA programs. But 7(a)’s parameters do not apply to all SBA programs, despite some brokers thinking otherwise.
In my opinion, the SBA deserves its bud¬get — more than $22 billion — because of one program: the SBA 504 loan program. It is for small-business owners who want to acquire or construct their own facilities. Despite fallacies surrounding it and the SBA, this little-used pro¬gram can be an important tool.
The 504 program provides small-business owners with 90 percent loan-to-cost financ¬ing for most commercial real estate projects. These loans are structured with a conventional mortgage for 50 percent of the total project cost, combined with a government-guaranteed bond for 40 percent. The remaining 10 percent is the borrowers’ equity and is usually half as much as traditional lenders require. This lowers the risk for small-business owners as opposed to lower¬ing the lender’s risk profile with more capital injected into the real estate.
These loans are meant to finance total proj¬ect costs. The first mortgage is typically a fully amortizing 25-year term at market rates, while the second mortgage is a 20-year term but with the interest rate fixed for the entire term at below-market rates. For small-business owners, these loans and terms can provide the highest cash-on-cash return available in the commercial-mortgage industry.
Still, myths about it exist.
Myth No. 1: SBA loans take too long
The SBA is aware of small-business own¬ers’ time and of how busy they are. Its certified development companies (the SBA’s representatives on these loans) now move quickly. They often can examine borrowers’ underwrit¬ing documents in only 48 hours. Once lenders scan their borrowers’ documents, they can actually “drag and drop” them onto some of the certified development company’s or SBA’s secure servers.
This technological innovation saves the time of doing overnight mail and is a huge improvement in the slow-adapting commercial-mortgage industry. If an SBA loan’s approval process takes more time than this, it may be that a particu¬lar lender is holding it up.
Myth No. 2: SBA loans have too much paperwork
There have been great efforts to streamline the overall application process. In some cases, they can nearly match the paperwork of what any ordinary 80 percent loan-to-value conven¬tional commercial lender would need to approve a loan. Some borrowers find this paperwork is far less than what they had to complete when they refinanced their home loan. Specialized com¬mercial lenders have helped this along, too.
Myth No. 3: SBA loans are only for the worst borrowers or for startups
Unlike other SBA programs, 504 loans have no revenue or employee limits, and for practi¬cal purposes, they cap out around $6 million for most projects. Some SBA programs are for businesses still in their infancy or for startups. Overwhelmingly, however, 504 loans are not meant for new businesses that should be more concerned with using their capital to establish their place in the competitive landscape. Many 504 loan borrowers are companies that have tens of millions in sales.
The equity savings gained from SBA 504 loans are meant to provide economic development. Unhealthy companies simply cannot do this. Plain and simple, this loan program is a means of leveling the playing field for healthy small businesses contemplating commercial-property ownership.
Myth No. 4: SBA loans have too many fees
Unfortunately, this myth has been unjustly applied to all programs under the agency’s umbrella. While this is the reality for the 7(a) loan’s multi-tiered fee system, 504 loans recently had their already-lower fees reduced for the third-consecutive year. In truth, origination fees for SBA 504 loans average about 25 to 50 basis points higher than ordinary commercial-bank loans. However, even these fees usually can be negotiated for borrowers with better debt-service-coverage ratios and personal credit.
With the 504 loan product, these slightly higher fees seem reasonable and small for most business-owners. They understand that getting the highest cash-on-cash return avail¬able in the commercial-mortgage industry is paramount. This type of financing is tailor-made for small-business owners who want to decide where and when to best use their hard-earned capital yet still enjoy the advantages of property-ownership.
Myth No. 5: SBA loan rates are higher than conventional lending
SBA 504 loans nearly always have fixed rates. The effective, blended interest rates are com¬petitive with conventional bank financing. In addition, the government-guaranteed second mortgage on 504 loans is the cheapest money available for typical small-business owners who want to own their commercial real estate.
For most of 2005, the SBA bond rate hovered near 6 percent fixed for 20 years.
Myth No. 6: All SBA lenders are the same
Most credit criteria vary from lender to lender. For example, different lenders may focus on financing varying property types, or they may have differing requirements for manage¬ment experience or historic cash flow. It can be tempting to choose a lender based on rates alone, but other factors also are important.
Today’s SBA is different from even five years ago. Brokers can become more successful by carefully choosing a competent lender for their clients. When dealing with SBA loans, or any other loan product for that matter, the whole experience will be smoother and simpler with a specialist.
I believe the SBA 504 program provides the smartest financing available for small-busi¬ness owners. The loan terms and conditions are excellent compared to ordinary financing for freestanding commercial property.
Chris Hurn is Pres., CEO and Cofounder of Mercantile Commercial Capital, LLC based in Altamonte Springs, FL. His company focuses exclusively on providing SBA 504 loans for small business owners who want to acquire and/or construct their own commercial facilities. Contact him at 1-866-622-4505, info@mercantilecc.com, or visit
www.504Experts.com.
