Why the 504 loan may be your best financing option
Let's do some hypothetical loan planning:
Example 1: Your business has a real shot at long-term profitable growth. There's just one issue: You'll need new equipment to meet the new customer needs, and the equipment is costly.
The good news may well be an SBA 504 loan package, a combination of low down payment, low cost, fixed rate financing through your banker and Wessex 504 Corporation.
And more good news: In contrast to many government loan programs, the paperwork is easy.
Example 2: You need more space, and you're tired of paying rent - an ultimately positive situation that, depending on your business' situation, could involve an office condo or the purchase of a building.
SBA 504 loans are real estate (and equipment) based with, of course, low down payment, low cost, fixed rate financing through your banker and Wessex 504 Corporation.
And the paperwork is a breeze.
Example 3: If the building you're eying needs a little work, be aware that SBA 504 loans can be used for renovation and repair as well as purchase.
Example 4: (which in some ways may be the best example) The 504 loan can be used to refinance an existing, qualifying loan.
The SBA 504 loan exists to help qualifying smaller businesses grow and, in the process, generate additional local jobs. Qualifications are not complicated:
• The borrower must be a for-profit business.
• The business' tangible net worth must be less than $15 million and average net income less than $5 million after taxes for the preceding two years. If that doesn't work, the business can qualify by meeting a numbers-based employee test. For example, most manufacturers with fewer than 500 employees will qualify no matter what their income or net worth data.
• The borrower must have relevant management experience and the ability to repay the loan on time from projected operating cash flow.
• Loan proceeds can be used to purchase capital equipment (as in Example 1) or real estate (Example 2). Whether the real estate is an existing building or new construction, it must be owner occupied. In an existing building, the business must occupy at least 51 percent of the square footage. If new construction is involved, the business must occupy 60 percent of the building.
The loan process is equally uncomplicated:
• The borrower makes a 10 percent down payment.
• The lender, a participating bank chosen by the borrower, finances 50 percnet of the loan amount with a conventional loan.
• A nonprofit community development company certified by the SBA to originate and service 504 loans (that's us, Wessex 504 Corporation) provides the remaining 40 percent.
What is especially intriguing, however, is the ability for businesses to use the 504 loan to refinance existing debt (Example 4, above). There are rules, of course, but - like the entire 504 process - the re-Fi rules are not complicated:
• The debt to be refinanced must be at least two years old, and the business must have been operating for the entire two-year period.
• The property must be owner occupied.
• Loan payments must be current for at least 12 months prior to the application date.
Business owners can refinance their conventional mortgages up to an amount equal to 90 percent of the appraised value of the building.
In addition, the business can opt to take out any equity it has in the property (up to 25 percent of the appraised value) and use it for itemized business expenses - perhaps paying off other, higher-rate debt; buying inventory; implementing marketing and social media programs; or filling working capital needs.
Federally guaranteed loans are not eligible for refinancing.
Hmmm. Interested? Want more information? Talk to your banker - every bank can make SBA 504 program loans, though some choose not to participate. Or talk to me at Wessex 504 Corporation: (312) 527-4927.
If necessary, I'll help you find a banker.
• Karen Lennon is president of Wessex 504 Corporation, one of Illinois' leading developers of SBA 504 loans. Contact her at (312) 527-4927.