4 minute read
SBA 504 Lending: Going Beyond PPP To Revitalize Our Economy By Manuel Flores, President and CEO, SomerCor
Banks have been playing a critical role in support of small business owners throughout the COVID-19 crisis. When it came time to provide immediate relief, banks stepped in front to participate in the Small Business Administration’s (SBA) Paycheck Protection Plan (PPP) loan program.
Now as the nation shifts to reopening and rebuilding our economy, banks have an opportunity to once again lead the way in support of small business growth and expansion through a different SBA initiative – the 504 (and 504 refi) loan program.
The 504 loan is designed to help entrepreneurs access affordable financing with the goal of growing small businesses, creating jobs, and increasing local economic development. The loan is for small businesses to purchase, expand or refinance commercial real estate or heavy equipment for their operations. Last year, the SBA 504 program helped more than 6,000 businesses secure a combined $5 billion in financing. The program is popular with small businesses because it provides 10, 20 or 25-year loan terms at below–market, fixed interest rates. These favorable terms result in more predictable and lower monthly payments.
Because the 504 loan program requires the participation of a thirdparty lender (usually a bank), it is a public-private partnership that comes with notable benefits to participating banks as well. Far from a financing tool of last resort, the 504 program enables banks to participate in strong small and mid-size business loans, diversify loan portfolios, mitigate lending risk, expand their credit box, and earn Community Reinvestment Act credit.
It is the unique structure of the loan that provides benefit to both the borrower and bank. A 504 loan offers up to 90% financing for established businesses. The bank finances 50% of a project while the SBA, through a Certified Development Company (CDC), covers the remaining 40%. In the case of a new business, the borrower puts 15% down, decreasing the SBA portion to 35%. For new businesses in a single-use building (i.e. carwash or gas station), the borrower puts in 20% and the SBA covers 30%. (See below)
No matter the project type, the bank takes a first lien position at a 50% Loan To Value (LTV). The deal structure limits bank exposure, decreases the impact on bank liquidity, and helps borrower creditworthiness across the board.
The SBA 504 program includes a refinance option for small businesses to restructure existing debt on their commercial real estate. The refinance program provides immediate cash flow benefits and unlocks real estate equity to provide cash-out for eligible expenses. The 504 refi can also increase working capital by lowering monthly mortgage payments and reducing uncertainty with a long-term, belowmarket fixed interest rate SBA loan.
During an economic downturn, the 504 refinance program offers banks a strategic lending option to strengthen existing credits and loan portfolios. COVID-19 has wreaked havoc on our economy, triggering a recession affecting the viability of many businesses and increasing the likelihood of business loan failures. A banker can use the 504 refi to help existing customers take advantage of lower interest rates and access to equity, while at the same time reducing their credit exposure through the lower LTV. The SBA first launched the 504 refi as a pilot program in response to the Great Recession from 2010 to 2012. The pilot was so effective it became a permanent SBA lending option in 2016.
For some banks, the PPP loan program was their first experience with SBA lending. While PPP can claim
Business in mixed or single-use building
40% SOMERCOR SBA 504 Loan
10% Borrower Capital
35% SOMERCOR SBA 504 Loan
15% Borrower Capital
50% Lender Loan
New business in single-use building
30% SOMERCOR SBA 504 Loan
20% Borrower Capital
50% Lender Loan
many successes, there is little debate there were significant challenges in the rollout and implementation, mostly attributable to the newness of the program and its evolving rules and guidance. This is in direct contrast to the SBA 504 program, which has been in place for more than thirty years and has a well settled framework.
Moreover, unlike the PPP loan, where banks are on their own for navigating SBA requirements, a CDC, like SomerCor, manages the 504 loan application, underwriting, funding, and servicing. CDCs are certified by the SBA as non-profit corporations charged with promoting economic development through SBA 504 loan program. CDC staff have a high-level of expertise and serve with the dual purpose of helping small business owners access the 504 loan and partnering with participating banks to navigate the SBA lending process quickly and efficiently. In a sense, the bank is able to outsource the entire SBA loan process to the CDC while making a conventional senior mortgage loan at a 50% LTV.
As we continue the fight against the COVID-19 health crisis and move to restart our economy, many industry sectors will experience radical change transforming business models, altering operations, and impacting revenue streams. Some businesses will need to expand rapidly to meet new demand, while others may need to shore up capital for expected lean years ahead. Either situation provides an opportunity to explore how the SBA 504 loan program can provide support to meet current lending parameters at your bank to best serve your business customers and help lead the way to revitalize our economy.
About the author: Manuel Flores is President and CEO of SomerCor, a non-profit lender certified by the Small Business Administration that specializes in SBA 504 loans. IBA Associate Member
