Pub. 8 2020 Issue 2

22 The Community Banker www.mibonline.org Guest Article SBA 504 AND PROGRAM ADVANTAGES DURING COVID-19 AND BEYOND T he current situation with COVID-19 is creating challenges, and business own- ers are looking for ways to best support their business during this time. The U.S. Small Business Administration has several loan programs to help small businesses get the funds they need. The CARES Act established several new temporary programs to address COVID-19, but the traditional programs are still available. One of the largest traditional SBA programs, used to purchase real estate or large equipment, is the 504. The SBA 504 Loan program is a powerful economic devel- opment loan program. Purpose of the SBA 504 Loan Program The purpose of the SBA 504 Loan pro- gram is to stimulate growth, expansion and modernization of small businesses. With the SBA 504 Loan program, a small business can borrow money to purchase real estate or equipment for their operations with long terms, low down payments and fixed-rate financing. While the perception in the past may have been the SBA 504 Loan program was one of last resort, it is now viewed as a structuring advantage. The program enables businesses to retain needed capital while lenders can limit their credit expo- sure and retain good collateral coverage for their loans. Financing Options The standard SBA 504 Loan financing comes from a partnership with a lender, Big Sky Finance and a small business. The source of funds is typically 50% from the lender, 40% from Big Sky Finance and 10% from the small business. The small busi- ness contribution increases to 15% in the case of a new business or special purpose building or 20% if both apply. The com- bination of the two loans provides highly leveraged, long-term financing. There is no upper limit to the total project size, but there is a minimum of $100 million. In addition to the standard 504 financings, there are two debt refinancing options. The first option allows debt refinance if the proj- ect includes expansion of the small business, and the amount to be refinanced does not exceed 50% of the cost for the expansion. The second option allows debt refinancing without expansion, and equity may be used for other business expenses. Lender Advantages The SBA 504 Loan programhas advantages for lenders and helps them retain an active role in their local business ’ s long-termneeds. When partnering with Big Sky Finance through the SBA 504 Loan program, the lender can over- come some of the following lending challenges: • Low loan to cost (generally 50%). No SBA guarantee is needed, and the lender’s final exposure is reduced. • Collateral is project-specific. The lender has a first lien position, and the SBA 504 loan has a second lien position on the collateral. This structure leaves assets available to support other loans. • No restrictions on lender ’ s pricing, except a reasonable interest rate and a term of at least seven years for equipment and 10 years for real estate. A reasonable maximum interest rate is set by SBA and is currently 6% over the New York Prime Rate. • There are no monthly fees to Colson Services. A lender retains all the fee income! No guaranty fee or annual servicing fees are paid to SBA as part of their loan. • SBA approval process and paper- work are handled entirely by Big Sky Finance. Big Sky Finance works with the SBA to process the 504 loans. The lender makes its own credit decision and uses its own loan documentation. Business Owner Advantages There are advantages for lenders and for the business owner too. By Braden Berger, Director Business Finance, Big Sky Finance