CRE Midwest

SBA 504 loan program: Ideally suited for manufacturing businesses

For years, small businesses looking to grow and expand their operations have found a powerful and supportive ally in the Small Business Administration (SBA). Its SBA 504 loan program is designed to meet the needs of small businesses by providing access to attractively priced financing options not available through conventional sources.

By Gabe Beukinga

Senior Vice President-SomerCor 504

For years, small businesses looking to grow and expand their operations have found a powerful and supportive ally in the Small Business Administration (SBA). Its SBA 504 loan program is designed to meet the needs of small businesses by providing access to attractively priced financing options not available through conventional sources.

Through the SBA 504 lending program, small businesses finance the purchase, construction and renovation of commercial real estate as well as the acquisition and installation of heavy machinery and equipment through long-term, government-guaranteed loans. The ability of a business to combine real estate and equipment purchases makes the program ideally suited for manufacturing firms and related companies.

Client summaries

Following are summaries of companies who have reaped the benefits and advantages of the SBA lending program.

  •  A manufacturer and distributor of plastic carrier tape and thermoform prototype and production tooling to customers in the electronics and healthcare industries, among others. For more than four years the firm has used the 504 loan program for the acquisition of its St. Charles facility, the purchase of additional manufacturing equipment and the refinancing of term debt on various pieces of equipment. The company is using its fourth 504 loan to acquire a second facility in Batavia. This new 504 will allow the firm to continue to make capital expenditures, grow and hire additional employees.
  •  A manufacturer and distributor of manifold blocks used the SBA 504 loan program to purchase approximately $4 million worth of state-of-the-art equipment that was essential to its ongoing growth and expansion, dictated largely by the needs of its largest client.
  •  A west suburban-based gourmet popcorn manufacturer and retailer purchased its state-of-the-art food preparation and distribution center along with various pieces of equipment through the SBA 504 loan program.  To facilitate their fast-growing retail business, the company purchased a 53,040-square-foot building in west suburban Burr Ridge. It also completed an extensive building renovation and acquisition of industrial food processing and preparation equipment to handle their expanding business.
  • In the largest SBA 504 transaction ever completed, a Chicago food manufacturer was approved for a $20 million loan package that allowed the firm to significantly expand its current facility by more than 100,000 square feet and add 100 jobs. Requiring some creativity and perseverance, the food manufacturer secured multiple SBA loans. Characterizing company initiatives as multi-faceted (real estate expansion, equipment expansion and cash out) created three separate, unrelated events, which ultimately doubled the SBA loan commitment.
SBA504 program basics

This program annually facilitates billions of dollars in commercial real estate transactions as well as improvements and equipment purchases.  In a typical SBA 504 loan:

  • a bank provides the first mortgage at 50 percent loan-to-value
  • a certified development company (CDC) like SomerCor 504 provides the second mortgage of 40 percent and
  • the borrower puts down 10 percent.
Conventional lending often calls for 25 to 35 percent down in this market, so the out-of-pocket savings is significant.
  • Net worth qualifications — To qualify for a 504 loan, the tangible net worth of a company was increased to $15 million (from $8.5 million), while after-tax net income as high as $5 million (up from $3 million);
  • Increased Loan Values—Applicants are eligible to receive between $5 and 5.5 million in SBA dollars (up from between $1.5 to $4.0 million)
Streamlined process

Most who have done SBA loans say the process is really no more involved than a conventional loan. In fact, much of the paperwork is the same and the SBA loan approval process can be done simultaneous to the bank portion. Standard documentation includes:

  • Current financials (within 120 days of application) on the operating company; listing of accounts receivables and payables
  • Two years of projected income and expenses (new businesses)
  • Personal history and financial statements on all owners of 20% or more of both the operating company and realty company set up to take title to the property
  • Credit report on operating company and guarantors
  • Appraisal and environmental reports (may be a condition of loan closing)

Gabe Beukinga is senior Vice President and Team Leader of SomerCor 504. Over the last two years he has been one of the leading SBA loan officers in the State of Illinois and in the country.