SBA 504 Loan program can facilitate unprecedented growth for small businesses today

Since the passage of the massive American Recovery and Reinvestment Act (“the Act”) in February, SBA 504 loans have increased significantly. The primary reason for this has been the added incentives created within the Act. With business valuations down to extremely low levels, small and mid size companies can utilize the benefits of the Act to acquire new assets very inexpensively.

Since the passage of the Act, the weekly loan volume of SBA 504 loans has increased by 45%. As stated, this can only be accounted for by the added incentives created by the Act. Most notable of the incentives is the elimination of fees charged by the SBA. Further, what was once prohibited, refinancing of existing debt is now eligible in the 504 program. Additionally, due to the Act, the Certified Development Companies (“CDC”) which administer the 504 are heavily motivated to fund 504 projects. Often, we are seeing cases in which the CDC has approved their 40% of the loan and are seeking the lender to put up the remaining 50%. The lenders are incented to provide the 50% financing because they take a first position on all collateral – which means that they are financing expansion plans for an existing business at a 50% loan to value. So what does this mean to the borrower?

The borrower stands to make the most out of this arrangement. They are issuing long term (in most cases 10 year) debt at below market interest rates with as little as 10% of their own equity infused into the deal. The use of the proceeds is new assets for their business – which are acquired today at extremely favorable terms.

In short, a small business can issue new debt at a present rate of 5.35% to acquire assets that can spur growth rates which reach double digit multiples to the cost of borrowing.