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updated: 12/14/2020 2:08 PM

SBA 504 Program: Proven impact in times of economic uncertainty

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By Joseph Bailey
SomerCor

The COVID-19 pandemic and the resulting mitigation policies impact every American, but small business owners are facing unprecedented challenges and uncertainty.

According to a recent economic report produced by Yelp, nearly 100,000 small businesses have permanently closed since the start of the pandemic.

With the timing of unrestricted economic recovery still unknown, small businesses look to the U.S. Small Business Administration for resources. SomerCor, a small business lender certified by the SBA, is proud to play a part in the agency's role in providing access to capital to entrepreneurs during this crisis through the SBA 504 loan.

This financing tool is a public-private lending solution for small business owners to buy, expand or refinance major fixed assets -- commercial real estate, equipment and machinery. Since the start of the pandemic, 504 program participation has soared, leading to the largest monthly funding in the program's 34-year history in September 2020. Here are three points highlighting how this trusted long-term financing option supports improved cash flow for small businesses during these economically challenging times.

Proven performance in the pandemic

Since the start of the COVID-19 pandemic through the end of fiscal year 2020 (March 1-September 30), 4162 SBA 504 loans, with a volume of $3,275,074,000, were approved nationwide -- 180 of these loans were for projects in Illinois.

The 504 can be a good fit for businesses growing from an increase in demand, as well as companies conserving and needing to shore up capital. Borrowers span a variety of industries, including manufacturing, health care, storage and logistics, franchises, hospitality, professional services and senior care.

Since the start of the pandemic borrower success stories include a landscape design company in Villa Park, a plumbing and HVAC services firm in Roselle, a plastics recycling plant in Lake in the Hills, a sheet metal manufacturing facility in Grayslake, and a fast-food franchise in Fox River Grove.

Lowest interest rates

The SBA 504 program has several borrower-friendly elements, including requiring less money down, loan payment predictability and fixed 20- or 25-year terms. But perhaps the most attractive feature of the program is the below-market interest rate. In August 2020, the interest rate was the lowest in program history. Rates have been consistently at or below 3% since March 2020.

Joseph Bailey
Joseph Bailey

Lower interest rates mean lower and more affordable monthly mortgage payments, freeing up capital to improve cash flow and reinvest in the business.

Interested borrowers can use the program to purchase commercial real estate and realize savings in building ownership vs. renting space. One client example is a dental practice located in central Illinois. By purchasing his office, he decreased his monthly payments by 42%. These lower monthly payments allow the borrower to focus on investing in his business with a look toward growing his practice.

Provides stability and access to cash

The SBA 504 refinance program can also provide benefit to business owners who already own their space through a conventional loan. To qualify the mortgage must be at least two years old and be current on payment.

In addition to the borrower-friendly terms of the 504 loan, refi clients can take cash out for eligible expenses. The cash out piece ranges up to 20% of the appraised value of the property. Eligible expenses for cash out funds include non-owner salaries, rent, utilities, inventory and a business line of credit or business credit card debt. The refi is a great option for existing businesses to save on monthly payments and improve cash flow to address more immediate issues. The 504 program has a history of being an important economic recovery tool.

• Joseph Bailey is AVP and loan officer at SomerCor.