Where to Go When the Bank Says “No” Part II: The SBA 504 Loan Program

Allen E. Fishman, TAB Founder and Chairman

In a recent survey of small- to medium-size business owners, the availability of capital was ranked in the top 3 risks for small businesses in 2012. So, what can we do when the bank says, "No"?

Entrepreneur.com reported that in 2010 the SBA provided U.S. small businesses with over $50 million in loans per day.  I especially favor the SBA 504 loan program.  The 504 is a lending partnership between a bank of your choice and a certified development company (CDC).  The SBA sells a debenture for 40 percent of the total loan amount to the CDC who in turn loans it to the borrower.  The 504 provides a long-term, fixed-rate financing option to acquire real estate, construct buildings or purchase major equipment.

The obvious question is, “How much can I get?”  The SBA typically finances from $1.5 to $2 million to qualifying businesses. In addition to meeting the SBA size guidelines for small business qualification for the 504 includes meeting a public policy goal of creating or retaining at least one job for every $50,000 the SBA loans.  The key word here is “retain”; if a business is forced to relocate, jobs may be lost and the guidelines would not be met.  In addition, the SBA can finance up to $4 million for manufacturers.

Typically, the 504 loan package features 40 percent financing through the CDC, 50 percent financing through a private lender, and an investment of 10 percent from the small business borrower. In many situations, especially when moving, additional government assistance can be obtained to help with the business owner’s investment requirement. 

Because the CDC takes a second lien position, a private lender is often more willing to provide financing since their 50 percent investment is secured by 100 percent of the assets.  The SBA portion of the loan has a fixed, low interest rate and the maturity is usually between 10 and 20 years.  In most cases, SBA authorization will take up to 30 days after lender commitment. 

Call your CDC and talk to a loan officer to discuss your project. There are about 270 CDCs nationwide and each covers a specific geographic area. You can find the CDC in your area by visiting http://www.sba.gov/gopher/Local-Information/Certified-Development-Companies/. Then, find a bank that wants to participate, meet with the CDC loan officer and structure the deal. The CDC application will generally require the same materials you would submit to your bank.

Allen E. Fishman founded The Alternative Board® (TAB), the world’s largest franchise system providing advisory board and executive coaching services to business owners, Presidents and CEOs. TAB’s worldwide business advisory network operates in over 1,000 cities in the United States, Canada, the UK, and Venezuela.

Fishman is also the author of several books in which he shares his business insights to help business owners, including two best-sellers: 7 Secrets ofGreat Entrepreneurial Master: The GEM Power Formula for Lifelong Success (McGraw-Hill, 2006) and 9 Elements of Family BusinessSuccess: A Proven Formula for Improving Leadership & Relationships inFamily Business (McGraw-Hill 2008).

Where to Go When the Bank Says No - Small Business Investment Companies

Allen E. Fishman, TAB Founder and Chairman

What if the amount of money you need is more than what the bank will lend you, even with an SBA-backed loan?  Licensed and regulated by the SBA; Small Business Investment Companies (SBIC) fill the debt and equity investment niche between straight lenders and venture capitalists.  Investments by SBICs have fostered the growth of companies including Federal Express, Intel, America Online and Outback Steakhouse.

SBICs use their own capital, plus funds borrowed from the federal government to provide small companies with long-term, fixed-rate loans that are guaranteed by SBA.  To qualify, your company must have a net worth of less than $18 million and average after-tax earnings of less than $6 million for the past two years. 

SBICs tend to have greater flexibility in terms of financing options, which results in loans tailored to the needs of the individual’s small business concern.  In addition, SBICs are more risk-tolerant than banks or traditional venture capitalists.  To offset this risk, and since the nominal interest SBICs charge is competitive (and often less) than other lenders, SBICs attempt to earn this extra return by sharing in the equity of the borrower. 

This often takes the form of indirect ownership in the form of warrants to purchase common stock or notes that are convertible into common stock.  In other cases, SBICs will acquire a direct equity interest in the common stock of the borrower.  Through this equity participation, most SBICs seek to earn a rate of return on investment somewhere between the interest rate charged by finance companies or SBA loans and the very high target rates of return sought by traditional venture capitalists.

SBICs are restricted from owning more than 49 percent of one company and it is rare for an SBIC to have that large of an ownership.  This allows a small business the benefit of interested equity investors without relinquishing control. 

Most SBICs are interested in all types of businesses, while others like to invest in specialized industries.  Remember, like other funding options, you will need a strong business plan to approach SBICs.  You can find a directory of SBIC licensees at www.sba.gov/inv.

Allen E. Fishman founded The Alternative Board® (TAB), the world’s largest franchise system providing advisory board and executive coaching services to business owners, Presidents and CEOs. TAB’s worldwide business advisory network operates in over 1,000 cities in the United States, Canada, the UK, and Venezuela.

Fishman is also the author of several books in which he shares his business insights to help business owners, including two best-sellers: 7 Secretsof Great Entrepreneurial Master: The GEM Power Formula for Lifelong Success(McGraw-Hill, 2006) and 9 Elementsof Family Business Success: A Proven Formula for Improving Leadership &Relationships in Family Business (McGraw-Hill 2008).