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For SBA fixed-asset lending, think 504

Bank-graphic_rgbMississippi’s small businesses looking to buy land, build a building, physically expand or buy new equipment often turn to the Small Business Administration’s 504 loans.

The fixed-asset loans offer fixed rates of from 10 to 20 years in amounts up to $5.5 million. They are administered through a pair of subsidiaries of the state’s regional planning entities: The Central Mississippi Development Co., an arm of the Central Mississippi Planning and Development District in Jackson, and Three Rivers Development Co., an arm of  the Three Rivers Planning and Development District in Pontotoc.

As “Certified Development Companies” under the SBA’s 7A lending program, the two entities represent the SBA in participating in the business lending.

» READ MORE: Community Bancshares still a top destination for borrowers seeking SBA loans

» READ MORE: A Q&A with the SBA

Unlike SBA small business lending, the agency’s 504 lending does not involve loan guarantees. What it does do, however, is provide 30 percent of the loan, with the borrower providing 20 percent and the private lender the remainder.

Banks gain comfort in making a loan for which half is covered either through equity from the borrower or money from the SBA. Further, the bank is first lien holder on the fixed assets the borrower is buying.

Mississippi’s 504 lending started in 1984 with the funding of a small barbecue restaurant in Vicksburg. In the years that followed, state officials had hoped to see the bulk of the lending go into the manufacturing sector where thousands of jobs could be created, according to Larry Anderson, the 504 loan officer at the Central Mississippi Development Co.

At its inception, the 504 program — which the SBA called the 503 in the program’s early years — provided lending stability for small business borrowers by giving fixed rates for fixed terms ranging from 10 to 20 years.

The 504 loans still provide the fixed term and fixed rates. “Usually the rate is better than the bank rate available,” Anderson said, but added banks have become eager enough to do new small commercial lending that they have lured away some borrowers who otherwise would have opted for 504 loans. “They are willing to go ahead and give a loan at 4 or 5 percent,” he said.

The result: Activity has been “kind of flat” for 504 lending, Anderson noted.

The SBA portion of Mississippi 405 loans totaled $7.9 million in 2007; $18 million in 2008, $12 million in 2009 and $7 million in 2010.

The total fell to $325,000 in 2011 before rebounding to $12.2 million in 2012. The total fell back to $3.3 million in 2013 and is at $6 million as the SBA nears the end of its fiscal year on Sept. 30, according to figures Anderson provided.

This year’s 405 lending from Anderson’s Central Mississippi Development Co. has included $3.2 million for a Hilton Garden Inn in Flowood; $810,00 for a Rieman Family Funeral Home in Ocean Springs; $810,000 for Sal & Mookie’s New York Pizza & Ice Cream Joint in Biloxi; and $719,000 for Madison Pre-School.

Three Rivers Development Co. 405 loans have included $4.1 million for Holiday Inn & Suites Hotel in Starkville; $1 million for Meridian plastics and resin manufacturer Solaplast LLC; and $369,000 for Domino’s Pizza of Southaven.

Meanwhile, Mississippi’s banks have taken to refinancing 405 loans made 10 years ago at rates above those charged today. Banks see the 405 borrowers as “seasoned” candidates for refinancing; the borrowers see a chance to lower debt costs, Anderson said.

“A number of our loans from 2007 have been paid off,” he said.

The SBA funds its 504 loans through debentures it sells to investors across the country, according to Anderson.

The loans are limited to fixed assets such as land and buildings and equipment with a usable life of at least 10 years, he said.

Anderson gave this example of a loan for a $1 million bed-and-breakfast inn in Rankin County. “You have to come up with 20 percent as a down payment. The bank comes in with 50 percent. They have first lien. The SBA guaranteed debenture would be 30 percent.”

Typically, according to Anderson, the bank is willing to provide some of the working capital since it has 50 percent of the loan already covered and has a stake in the success of the business.

A key rule of 504 lending is that each $50,000 of the 30 percent of the SBA loan contribution must produce one full time job. While loans of up to $5.5 million to individual hotel projects are unlikely to produce jobs sufficient to qualify for the loan amount, jobs created through total lending to all 405 borrowers over a fiscal year are used to calculate eligibility, Anderson explained.

“This is why we look for companies that are going to hire a lot of people,” he said.

The process for borrowers who come in prepared with a business plan is usually pretty quick, according to Anderson. The lengthiest wait involves getting appraisals completed, he said.

Most of the borrowers are sent over from the banks they have approached for lending, he noted. “The banks have usually already done some initial underwriting.”

The loan package is sent to the SBA processing center in Sacramento, Calif., for further underwriting.

If all goes well there, the SBA issues a debenture and the bank is notified to do the initial construction loan. That is followed by a permanent loan for which the 504 program provides its 30 percent, Anderson said.

About Ted Carter

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