With the economy still in recession and credit virtually dried up, many small to mid-sized businesses are finding it difficult to secure loans for fixed assets. Although credit has been restricted, businesses still have access to funds at reasonable rates and with low fees. Specifically, the Small Business Administration's 504 loan program is still a strong and viable source of funds for companies.
The SBA 504 program was established to help stimulate economic growth, job creation, and promote public policy goals by supporting small businesses in the acquisition and expansion of real property. The program is facilitated through co-lender financing with a variety of bank and non bank institutions. The typical structure of a 504 loan is as follows:
The bank covers 50% of eligible costs. The amount provided by the bank is not backed by the SBA. Furthermore, the bank is able to set their own rates and fees for their portion. An SBA certified Capital Development Corporation will provide funds at a fixed rate for up to 40% of eligible costs through a government backed loan. Generally, a Business Development Officer or an independent consultant working with the CDC acts as a facilitator and helps bring together the documents and parties to execute a SBA loan. The remaining amount is covered by the owner and can be anywhere from 10-20%. Certain micro-lenders offer small business loans to cover the owner's injection in order to help the company preserve working capital. Rates and terms can vary for these loans, but they are available.
There are several advantages to a 504 loan. For the lender, they are handling a loan with a lower loan to value ratio (LTV) and are able to set their own rates and fees. For the borrower, the 504 loan helps preserve working capital with lower injections at rates generally below market and for a longer term. Also, recent changes brought about by the stimulus bill and other policy amendments have generated funding for special initiatives including the development of energy efficient, LEED certified buildings.
Whether a company is looking for a traditional loan or a SBA 504 loan, according to Helena Hauk, owner of 5th Gear Consulting which specializes in 504 loans, there are .
Credit History: The lender will look at both your personal and business credit.
Vested Interest: A lender wants to know they are lending to a business owner who will work hard to insure the company is profitable and can repay its debt. Therefore, having a reasonable amount of equity invested in your company shows you are committed to its future.
Working Capital: You must have a reasonable amount of cash on hand.
Ability to Repay: This includes both cash flow and some type of collateral.
Experience and Character: Are you qualified to manage and market the business you are in? Having relevant skills and experience instills confidence in your ability to drive your company toward success.
In addition to the common credit considerations, Helena also has a few tips to help businesses improve their chances of getting a loan. First of all, be sure to have a sound business plan. The business plan is the backbone of your company's strategy. It demonstrates knowledge of the industry, your client base, resources, management skills, and other factors affecting your business. A solid business plan tells the lender you are serious about your business and that you have taken the time to develop a plan to make it successful.
Next, Helena says to look at local lenders and consider your complete banking relationship as an asset when securing a loan. Local institutions, whether community lenders or local branches of national brands have a vested interest in building a comprehensive relationship with a borrower and in some cases require depository account. Also look at non-bank institutions such as credit unions. "Such lenders are moving increasingly toward commercial lending and business services where they have not been in the past. Either way a good place to begin is where your bank of account is, you already have the relationship in place, maximize it."
Above all, Helena says it's imperative to have both a solid credit score and a vested interest in your company. "Lenders like to see that an owner has at least a 25% equity stake in their company." A solid credit score speaks to the owner's ability to manage their finances effectively and wisely, a key factor no matter what type of loan one is seeking.
There are a few other things to consider. Depending on the type of loan, the structure of your business, and the kind of business you operate you may be required to provide a wide variety of documents. Relevant items include resumes of all owners and management, details of how the company operates and generates revenue, projections for future growth, details about the project being financed, and other important information. These documents can make or break a loan if not present or well executed. Again, this is where a solid business plan comes in to play. A little careful planning and organization before you speak to a lender can speed up the process tremendously and improves your chances of approval.
No matter what the state of the economy, sources of financing still exist for small businesses looking to expand and to meet public policy goals. With a little planning, research, and solid guidance from a professional, small businesses can still locate the funds they need to keep their company alive and booming. For more information on 504 and other government loans, visit the Small Business Administration's website at www.sba.gov. 5th Gear Consulting also has 504 page updated monthly with current interest rates and other relevant information at www.5thgearconsulting.com.