Jay Challa - Minority Enterprise Executive Council

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MetrobizSBA’s Best Kept Secret:The 504 Loan ProgramU.S. Small Business Administration (SBA)SBA’s 504 Loan Program is the only program that allows individualsmall business owners to purchase land, construct,purchase, and/or rehabilitate a building, and own it personally.For small businesses that are looking to move from leasedspace, it is a wonderful financing tool to purchase commercialreal estate. Why lease when you can buy?The 504 Loan Program is designed to provide fixed-ratefinancing to purchase long term and fixed assets, such aspurchasing land, improvements, including existing buildings,grading, street improvements, utilities, parking lots, machineryand equipment, and landscaping; construction of newfacilities; or modernizing, renovating or converting existingfacilities. Generally, the project assets being financed areused as collateral. Personal guaranties of the principal ownersare also required.The public policy goals are as follows:• Business district revitalization• Expansion of exports• Expansion of minority business development• Rural development• Increasing productivity and competitiveness• Restructuring because of Federally-mandated standardsor policies• Changes necessitated by Federal budget cutbacks• Expansion of small business concerns owned and controlledby veterans (especially service-disabled veterans)• Expansion of small business concerns owned and controlledby women.Built on a 50/40/10 relationship, a typical 504 project includes aloan secured with a senior lien from a private sector lender coveringup to 50 percent of the project cost, a loan secured witha junior lien from the Certified Development Company (CDC),backed by a 100 percent SBA-guaranteed debenture, coveringup to 40 percent of the cost, and an equity investment of atleast 10 percent from the small business being assisted. It canbe utilized for transactions involving gas stations, hotels, residentialcare facilities, and professional businesses. However,the 504 Loan Program cannot be used for working capital, inventory,consolidating or repaying debt, or refinancing.In order for a business to be eligible, it must operate for profit.Under the 504 Program, a business qualifies as small if it doesnot have a tangible net worth in excess of $7.5 million anddoes not have an average net income in excess of $2.5 millionafter taxes for the preceding two years. 504 loans cannot bemade to businesses that engage in speculation or investmentin rental real estate.Funding for a 504 loan is backed by 10-20 maturity debentureswhich are based on a current market rate for five-year and10-year U.S. Treasury issues. The maximum SBA debenture is$1.5 million for meeting the job creation criteria or for meetinga community development goal. Generally, a business mustcreate or retain one job for every $50,000 provided by the SBAexcept for “Small Manufacturers” which have a $100,000 jobcreation or retention goal. For manufacturers, the maximumSBA debenture is $4 million and $2 million when meeting apublic policy goal.As a small business owner, why should you consider theSBA 504 Program?• Low down payment. A small business is required to investjust 10 percent of the total project cost, which includesrenovations and soft costs. This allows the businessto preserve cash for working capital. (Ordinarily,banks require a 20 to 30 percent down payment on thepurchase price).22 Minority En t e r p r i s e Adv o c at e • January / February 2009
• Fixed rate on the SBA 504 portion.Small businesses don’t have toworry about the prime lending rategoing up and can calculate the exactamount of their mortgage paymentsfor 20 years.• Long term. 504 loans are for 10 or20 years. Because the CDC is in thesecond lien position, the lender doingthe 50 percent first lien loan is willingto lend at a longer term. Longerterms reduce monthly payments.• Low interest rate. Even with fees andclosing costs included in the rate, the504 Program offers a low fixed ratefor a subordinate mortgage loan. Theblended rate between the lender portionand the SBA’s 504 portion makesthe project very affordable, particularlyfor small businesses.SBA’s 504 Loan Program is administeredby CDCs. These certified developmentcompanies are non-profit corporationsset up to contribute to the economicdevelopment of their communities.CDCs work with the SBA and privatesector lenders to provide financing tosmall businesses.The following Certified DevelopmentCompanies located in the Washington,D.C. Metropolitan Area administer theSBA 504 Program:Business Finance Group, Inc3930 Pender Drive, Suite 300Fairfax, Virginia 22030(800) 352-0504(703) 352-9100 FaxContact: Sally Robertson,Executive Directorsrobertson@businessfinncegroup.orgArea Served: Commonwealth ofVirginia; District of Columbia andState of MarylandMid-Atlantic Business Finance Company1410 North Crain Highway, Suite 5BGlen Burnie, MD 21061(800) 730-0017(410) 863-7446Contact: W. Joseph Carton, Presidentjoe@mabfc.comArea Served: State of Maryland;District of Columbia;and Northern VirginiaChesapeake Business Finance Corp.1101 30th Street, N.W., Suite 500Washington, D.C. 20007(202) 342-2973(202) 342-0389 FaxContact: John Sower, Presidentjsower@chesapeake504.comArea Served: State of Maryland;District of Columbia;and Northern VirginiaPrince George’s Financial Services Corp.1100 Mercantile Lane, Suite 115ALargo, Maryland 20774(301) 883-6900(301) 883-6160 FaxContact: Shelly Gross-WadeExecutive Directorsgross-wade@pgfsc.comArea Served: State of MarylandJames River Development Corp.1108 E. Main Street, Suite 702Richmond, Virginia 23219(804) 344-0002Contact: Fred MintonRappahannock Economic DevelopmentCorporation (REDICO)3304 Bourbon Street, 3RD FloorFredericksburg, Virginia 22408(540) 373-2897(540) 899-4808 FaxContact: Rob Burke,Executive Directorrburke@redco@504.orgArea Served: Commonwealth of VirginiaThere are approximately 270 CDCsnationwide. To locate a certified developmentcompany nearest you and tolearn more about the 504 Loan Program,visit www.sba.gov. In addition,each month the District of ColumbiaEnhanced Business Information Centerlocated in the Martin Luther King,Jr. Memorial Library in Washington,D.C. conducts a free workshop on theSBA 504 Loan Program “How to Findand Finance Commercial Property.”For more information and to registercall (202) 727-2241.Minority En t e r p r i s e Adv o c at e • January / February 200923
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Jay Challa - Minority Enterprise Executive Council

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