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36 Nation's Business December 1993 I
<br /> FINANCE I
<br /> ! under the 504 program have helped years on the amortization schedule)and at lending criteria. Underwriting compo-
<br /> create more than 314,000 jobs since 1981. least seven years for equipment loans. nents that are considered include credit
<br /> history, management strength, the busi-
<br /> o better evaluate whether your corn- Interest Rates And Fees ness's track record, collateral, cash flow,
<br /> pany might qualify for a 504 loan and The interest rate for the CDC portion of and the company's level of equity
<br /> to learn how to proceed,consider the the loan package is fixed for the term of
<br /> following points: the loan and pegged to U.S.Treasury bill Role Of The CDC
<br /> rates. In October, the 10-year rate for Paul Herringshaw, executive director of
<br /> Underwriting Criteria equipment loans was 5.85 percent, while Centrolina Development Corp., in Char-
<br /> The SBA imposes several basic un- —__—_ —__ _._._ lotte, N.C., refers to the CDC as
<br /> derwriting restrictions on each pro- "the catalyst" for the 504 process.
<br /> spective borrower: Growth Of The SBA 504 Once the bank has preliminarily
<br /> ■The borrower must have been approved a 504 request,the prospec-
<br /> turned down for bank loans. lending Program tive borrower is turned over to the
<br /> ■The business owner must dem- CDC.
<br /> onstrategood character and man- (Total amount each fiscal inions of
<br /> dollars year.) "The certified development cor-
<br /> agement ability. poration works with the applicant
<br /> ■The collateral must be accepta- $800 and assists in preparation of the
<br /> ble. 700 .! package,"says Herringshaw,whose
<br /> ■The borrower must show ade- I ; CDC has helped create more than
<br /> quate cash flow to repay the loan. 600tt,f. ✓ 3,500 jobs in the past 10 years.
<br /> ■The borrower must own a sub- 4 After the CDC board of directors
<br /> stantial stake in the business. 500 VW,* y',!,. (made up of local bankers)approves
<br /> the loan, the CDC loan officer then
<br /> Types Of 400 / 4, recommends the package to the
<br /> yp Projects *° t,
<br /> According to Trautman, of Park ,, a \ SBA. Few requests are denied by
<br /> National Bank,ideal 504 candidates 300 I x?� ,z the SBA once they have passed
<br /> /include business owners who are 200 ' -u
<br /> e,..-
<br /> . ' muster with a bank and a CDC.
<br /> growing quickly and need additional y , , i 1
<br /> capacity,who are leasing their place 100 1 , „ °- , Role Of The SBA
<br /> 1 of business,and who lack the 20 to 25 _ In guaranteeing the CDC portion of
<br /> percentpayment typically p '�'- t 1 the loan,the SBA provides the glue
<br /> down a ent ty icall z e _-_ -
<br /> quired for conventional financing. 1988 1989 1990 1991 1992 1993* that seals a deal.Without the guar-
<br /> iiip "I recently made a 504 loan to a *Projected antee on the CDC loan, few banks
<br /> orrugated box converter," says SOURCE:SMALL BUSINESS ADMINISTRATION will provide a 90 percent loan.
<br /> Trautman, whose bank was one of The SBA has done an excellent
<br /> the most prolific 504 lenders in Ohio in the 20-year rate for real estate loans was job of leveraging its resources.No federal
<br /> recent years. "The company had been 6.75 percent. money is spent unless a 504 loan goes bad.
<br /> located in a 60,000-square-foot facility The interest rate for the bank's portion Agency official Orr reports losses of 0.5
<br /> that was partially condemned," he says. of the loan can be fixed or variable. percent of total dollars loaned.
<br /> "The down payment required for a con- A fee of about 3 percent is charged for
<br /> ventional loan would have been a stretch. all CDC loans, while a bank typically Not For Everyone
<br /> But we were able to put together a 504 charges a 1 to 2 percent fee on its portion The 504 program has many benefits,but it
<br /> package to finance both the construction of the financing package. is not for every small-business owner.
<br /> of a new 40,000-square-foot building and There are prepayment penalties at-
<br /> some badly needed equipment." Preparing For The Application tached to the CDC loan portion of the
<br /> Along with financing of construction, The borrower must submit several docu- financing. Consequently, a borrower
<br /> including land purchase, and acquisition, ments to the bank and the CDC,including thinking of refinancing or moving only a
<br /> renovation, or expansion of an existing financial statements covering the previ- few years after construction or expansion
<br /> facility, a 504 loan can also cover soft ous three years and personal financial would be well-advised to avoid a 504 loan.
<br /> costs, such as professional fees, surveys, statements for the principals in the corn- Not all banks are skilled at helping
<br /> and interim interest. pany. small-business borrowers pursue 504
<br /> The equipment financed must have a Borrowers must sign an agreement loans. A good relationship among the
<br /> useful life of at least 10 years and must not making them personally responsible for bank,the CDC, and the SBA is essential
<br /> be subject to short-term obsolescence. paying any portion of a defaulted loan not to the timely completion of the 504
<br /> covered by the collateral. approval process.
<br /> Project Size Limitations For new real estate projects or for With the requirement that one job be
<br /> The SBA places size limitations only on renovation, construction estimates and a created per $35,000 in CDC loan money,
<br /> the CDC loan portion of the project. The completed set of plans and specifications the program might not work for a busi-
<br /> minimum amount for a CDC loan is must be submitted. An equipment-loan ness owner looking to add equipment,
<br /> $50,000, and the maximum is $1 million. request should include estimates on the such as robotically controlled machinery
<br /> Given that the CDC loan usually provides total cost of the machinery to be pur- which could decrease employees.
<br /> 40 percent of the overall project amount, chased. Although the program may not be
<br /> ie total value of a-504 project ranges appropriate for everyone, 504 loans have
<br /> om$125,000 to$2.5 million. Role Of The Bank helped thousands of companies secure
<br /> The local bank is the starting point for all much-needed financing for capital im-
<br /> Loan Terms 504 loan requests.It is important to find a provements or equipment purchases. N3
<br /> The participating bank is required by the lender familiar with the program.
<br /> SBA to extend a term of at least 10 years The bank analyzes the feasibility of the .1•, To order reprints of this
<br /> , for real estate projects (most will go 15 loan request based on its standard set of V article, see Page 76.
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