Though the commercial lending markets are still tight, the U.S. Small Business Administration’s 504 Loan program is providing some breathing room for businesses looking to expand.
That’s the story of engineering firm Environmental Alliance, which was able to relocate to a larger headquarters in Pike Creek thanks to $2,621,000 in SBA 504 financing.
The company is now seeking to hire 13 new employees, in part because the structure of the loan gave the firm more stability and cash to reinvest in the business, said Bill Smith, president of the firm.
Unlike typical commercial loans that are restructured after five or seven years, the interest on the firm’s SBA 504 loan remains fixed for its entire 20-year duration, Smith explained. That fixed rate made this the right time to expand, he said.
The loans, which are available for small businesses making capital improvements, are increasing in popularity throughout the First State, said Jayne Armstrong, district director of the SBA in Delaware.
Eight SBA 504 loans have been awarded in Delaware this year, up from five last year, and four loans are in process, she said.
“The interest rates associated with the SBA 504 loan program are now at a historic low and we hope more small businesses take advantage of it,” she said.
Current interest rates are at 4.6 percent and those low rates are possible because of the structure of the loan, explained William C. Abernethy, executive director of the Delaware Community Development Corporation, the certified development company that underwrote Environmental Alliance’s loan.
Forty percent of a 504 loan is funded by a certified development company, he explained, and is backed through monthly bond issues of government-secured debt. Fifty percent is provided by a bank and the remaining 10 percent is chipped in through owner’s equity, he said.
Typical commercial loans can require business owners to kick in up to 25 percent, he said, so less cash out for the loan means more money to put back into the business.
And the program is also attractive to Delaware banks, especially those that have been criticized for being heavily invested in real estate loans and may shy away from expanding that loan portfolio, Abernethy said. The 504 loans give banks lower loan-to-value rates, he said, which means less risk for the bank.
“In these times when capital is so tough on banks, the lower loan-to-value is really a good thing for them to show bank examiners,” he said.
For lenders, like Citizens Bank, which provided $1,450,000 in financing to Environmental Alliance, are starting to see more firms interested in SBA-backed financing, said Scott Sukeena, senior vice president of Citizens Bank.
Despite the slow pace of economic recovery, companies that were not highly leveraged are starting to reinvest in equipment and buildings, he said, and while banks still look very closely at cash flow when approving loans, the backing of the SBA can give projects a boost.
