Cashing in on 504 loans: a Small Business Administration program has enabled thousands of companies to borrow at favorable rates and expand

Nation's Business, Dec, 1993 by J. Tol Broome, Jr.

"The certified development corporation works with the applicant and assists in preparation of the package," says Herringshaw, whose CDC has helped create more than 3,500 jobs in the past 10 years.

After the CDC board of directors (made up of local bankers) approves the loan, the CDC loan officer then recommends the package to the SBA. Few requests are denied by the SBA once they have passed muster with a bank and a CDC.

Role Of The SBA

In guaranteeing the CDC portion of the loan, the SBA provides the glue that seals a deal. Without the guarantee on the CDC loan, few banks will provide a 90 percent loan. The SBA has done an excellent job of leveraging its resources. No federal money is spent unless a 504 loan goes bad. Agency official Orr reports losses of 0.5 percent of total dollars loaned.

Not For Everyone

The 504 program has many benefits, but it is not for every small-business owner.

There are prepayment penalties attached to the CDC loan portion of the financing. Consequently, a borrower thinking of refinancing or moving only a few years after construction or expansion would be well-advised to avoid a 504 loan.

Not all banks are skilled at helping small-business borrowers pursue 504 loans. A good relationship among the bank, the CDC, and the SBA is essential to the timely completion of the 504 approval process.

With the requirement that one job be created per $35,000 in CDC loan money, the program might not work for a business owner looking to add equipment, such as robotically controlled machinery, which could decrease employees.

Although the program may not be appropriate for everyone, 504 loans have helped thousands of companies secure much-needed financing for capital improvements or equipment purchases.

J. Tol Broome Jr. is a loan administrator with FirstSouth Bank in Burlington, N.C.