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Continued
By Christopher Hurn, president and CEO, Mercantile Commercial Capital LLC
D
uvio 1ni iivs1 nii oi 1nis
year, there was an interesting and note-
worthy exception to the general decline
in real estate lending the U.S. Small Business
Administration (SBA) 504-loan program.
Although most SBA loans are down sig-
nicantly as a reection of the overall lending
environment, the 504-loan program, which
enables businesses to buy or enhance their own
commercial real estate, has actually posted some
surprising results. Te programs activity has
decreased by just 3 percent from 2007 in SBA
Region No. 4, which includes Florida and other
southeastern states; it has increased by 1 percent
in Region No. 1, which includes New York and
New Jersey.
The SBA and lawmakers have noticed the
504-loan programs performance, and several
new measures will help to make the loans avail-
able to thousands of businesses that would not
have qualied for it in the past.
As commercial real estate opportunities
become available, mortgage brokers can help
their small-business-owner clients reap the
benefits of owning versus leasing their space
with the help of the 504 loan program.
Higher ceilings
Recently, the SBA raised the ceilings on the net
worth and earnings of businesses that can qual-
ify for 504 loans. Companies with a net worth
of as much as $8.5 million and as much as $3
million in annual earnings may now obtain a
504 loan, compared to the prior limits of $7.5
million in net worth and $2.5 million in an-
nual earnings.
The 4-1-1 on the 504
Recent changes make the U.S. Small Business Administrations loan program more relevant
With this change, the SBA has demonstrated
that it recognizes the need to expand this loan
program to more businesses. Every year, millions
of available 504-loan-program funds go unused.
For scal 2007, for instance, the program had $1.2
billion left in its budget for loans funds that
went unused by borrowers. Unlike the SBAs 7(a)
program, the 504 program has never approached,
let alone exceeded, its funding limit.
Te new eligibility standards for businesses
will enable more companies to use the loan pro-
gram to grow their operations and create jobs.
Proposed changes
Te other and potentially more signicant
change has been proposed as part of the Small
Business Lending Stimulus Act of 2008, which
as of press time is being considered by the Sen-
ate Committee on Small Business and Entre-
preneurship. Provisions within this proposed
legislation would reduce fees for SBA loans and
open the 504-loan program for borrowers to re-
nance higher-interest conventional loans.
By opening the 504-loan program to refi-
nances, thousands of small-business owners
across the country could gain access to loans
that are substantially better than even the most-
competitive conventional loans for commer-
cial real estate. By signicantly lowering their
monthly commercial mortgage payment by re-
nancing with a 504 loan, business-owners can
use the funds to add employees and resources
to grow their businesses.
Advantages
Mortgage brokers can help small-business own-
ers purchase rather than lease their space
with the 504-loan program. Te savings in inter-
est payments, as well as in the 504 loans substan-
tially lower equity requirements, are signicant.
Te greater long-term benets, however, stem
from owning commercial property that can con-
tinue to generate income even after a business-
owner retires.
Business-owners can reduce their initial
capital outlay by leveraging the 90-percent
loan-to-cost nancing that 504 loans oer. Te
lower downpayment makes it easier for business-
owners to aord the initial capital outlay for an
acquisition or construction project. In addition,
the 504 enables borrowers to include renova-
tions, closing costs and other soft costs along
with furniture, xtures and equipment in the
nancing package.
Te 504 loan covers 90 percent of the total
project cost, as opposed to the 70 percent to
80 percent of the propertys purchase price or
appraised value (whichever is less) oered with
conventional commercial loans. The typical
breakdown of the funds in a 504 loan is: 50
percent from a bank or other private lender,
40 percent from the SBA and 10 percent from
the borrower.
Te portion of the 504 loan funded by the
SBA represents some of the least-expensive
financing available for small businesses. The
blended rates for the entire loan often are sig-
nificantly lower than those of conventional
loans and can be xed for the duration of 20- to
25-year amortizations. In addition, borrowing
from the SBA through the 504 program does not
preclude business-owners from also applying for
funding from the SBA 7(a) program for working
capital, inventory and other needs.
Requirements
Te SBA 504 loan is available to almost any type
of for-prot small and midsized business in the
United States, with the exception of nancial-
services providers, passive real estate investors,
Christopher Hurn is president
and CEO of Orlando, Fla.-based
Mercantile Commercial Capital
LLC, a 2007 Inc. 500 company
and one of the largest providers
of SBA 504 loans nationwide. He
can be reached at (866) 622-
4504. Additional information is available at www.
thesmartchoiceloan.com.
The SBA has demonstrated that
it recognizes the need to expand
[the 504] loan program to more
businesses. Every year, millions
of available 504-loan-program
funds go unused.
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The 4-1-1 on the 504
Continued
companies having a tangible business net worth
greater than $8.5 million, or companies with net
prots after taxes that averaged more than $3
million during the past two years.
Te 504 loan requires applicants to demon-
strate job creation, export potential, or other
economic-development or public-policy goals,
and the vast majority of applicants can meet
these goals.
Te funds must be used for capital expenses,
including land, buildings, construction and
equipment. Owner-occupancy requirements are
51 percent of the total square footage for acquisi-
tion loans and 60 percent for new construction
nancing. In addition, multiple businesses can
jointly pool 504 financing if they meet occu-
pancy requirements together.
Te current lending climate makes the 504-
loan program more essential and more ben-
ecial for small businesses than it has been in
the past 20 years. Recent changes as well as
proposed changes make the program more
accessible, affordable and relevant to todays
small-business owners.