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).