Pub 8 2020 Issue 2


SBA 504 And Program Advantages During COVID-19 And Beyond

The current situation with COVID-19 is creating challenges, and business owners 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 development loan program.

Purpose of the SBA 504 Loan Program

The purpose of the SBA 504 Loan program 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 exposure 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 business contribution increases to 15% in the case of a new business or special purpose building or 20% if both apply. The combination 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 project 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 program has advantages for lenders and helps them retain an active role in their local business’s long-term needs. When partnering with Big Sky Finance through the SBA 504 Loan program, the lender can overcome 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 paperwork 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.

  • Low down payment — just 10%. This low percentage lets the business owner preserve cash for working capital. (The 10% rate increases to 15% in the case of a new business or special-purpose building, or 20% if both apply.)
  • Low fixed rate for the term of the loan; these are currently at historic lows.
  • Long term loan, which means a lower monthly payment. Terms for real estate loans can be 10, 20 or 25 years. For equipment, machinery, or both, the loan term is 10 years.

Community Advantages

The SBA 504 Loan program stimulates private sector investment in long-term fixed assets to:

  • Increase productivity
  • Create and retain jobs
  • Increase the local tax base

COVID-19 Response

As part of the CARES Act, the U.S. Small Business Administration arranged for the federal payment of current SBA 504 loan payments for six months. When implemented, our borrowers were very grateful, with responses like:

“While we were deciding about using the SBA to help us with our new building two years ago, a good friend of mine told me, ‘if things get rough, the SBA will look after their customers.’ Boy, was he right!”

“Thank you! This is a huge relief.”

“WOW, thank goodness, that’s what I was needing, I know I am only one company in need; we all need the help at this time.”
“WOW! This is so great I could just cry. Thank you. Thank you. Thank you.”

“I would like to send a huge THANK YOU to all of you for making this happen and helping all us small businesses out! For me, I wake up every day saying a prayer for help, and you guys have answered that prayer tremendously!”

Also, during this unprecedented time, some of our borrowers become innovative; for example:

  • West Paw pivoted its operation, from making dog toys and leashes to making masks and PPE.
  • Simms Fishing Products shifted its focus from fishing gear to design, develop and begin manufacturing medical gowns for hospital personnel and staff.
  • Headframes Spirits started distilling hand sanitizer in addition to distilling their spirits.

Why Use Big Sky Finance?

Big Sky Economic Development Corporation, dba Big Sky Finance, is certified and regulated by SBA to package, process, close and service the SBA 504 Loan program anywhere in the state of Montana. Our four-person team has over 55 years of combined experience in making SBA 504 loans and working hard to guide you thru the SBA 504 Loan process.

Braden Berger, Director Business Finance, Big Sky Finance

This story appears in Issue 2 2020 of the Community Banker Magazine.