The Small Business Administration's 504 loan program may once again become a victim of its own success, as some participants fear that a second shutdown is on the horizon.
Last year, the 504 program, which provides small businesses with long-term financing to purchase commercial real estate and heavy equipment,
“Last year the program exhausted its authorization level before the end of the fiscal year, in September, and that is the first time that had ever happened in the 40-year history of the program,” Brent Swanson, president of 504 Capital Corp. in Chesapeake, Virginia, said. “This time is different in that the authorized cap is hitting its limit much sooner in the fiscal year. So, this would be much worse for all involved.”
NADCO and program insiders are calling on Congress to step in and boost lending authority so 504 — which is experiencing record loan volume — can avoid any disruption. “It is NADCO’s mission to work with Congress to ensure small businesses … have uninterrupted access to the capital that they need,” Pointon said.
The SBA has taken several steps in recent years to make 504 more appealing to borrowers. It
Last year the program exhausted its authorization level before the end of the fiscal year … This would be much worse for all involved.
There is no question the program’s momentum has carried over into fiscal 2022. Through Feb. 4, 504 lending volume totaled $3.82 billion, up 60% from the same four months in fiscal 2021.
By contrast, SBA reported lending volume totaling $6.6 billion for its flagship 7(a) loan guarantee program as of Febr. 4, and $36.5 billion for all fiscal 2021.
SBA 7(a) loans, which can be used to acquire businesses, for working capital and to purchase small-ticket equipment items, are made directly by banks. The agency acts as guarantor. The structure of 504 loans is more complicated. Banks and other lending partners fund 50% and hold a senior lien position. Certified development companies provide 40% with the borrower typically responsible for the remainder. As with 7(a) loans, the SBA acts as guarantor, guaranteeing up to 85% of 504 loans.
Now that Congress has passed a new continuing resolution to fund the government through March 11, NADCO and other 504 participants are hoping the five-week reprieve will give lawmakers the time they need to craft a permanent budget that includes increased lending authority for the program, which is currently capped at $7.5 billion for most loans (certain 504 refinance loans are funded from a separate budget).
“As always, we stay optimistic that Congress recognizes the importance of the SBA 504 program and will take action to prevent any interruption,” said Sherwood Robbins, managing director of Seedcopa, an Exton, Pennsylvania-based certified development company. Robbins also serves as a regional director for NADCO.
The SBA “works with the industry, [Office of Management and Budget] and the Hill to ensure sufficient lending authority is provided for our business loan programs,” said spokeswoman Shannon Giles.
Both Robbins and Swanson said their companies set records for 504 lending in fiscal 2021 and are on pace to shatter them in fiscal 2022. Through Jan. 31, 504 Capital reported 504 program loan volume totaling $41.3 million, up from $11.1 million a year earlier. Seedcopa reported volume totaling $17.7 million as of the same date, a year-over-year increase of 145%. According to Robbins, the 504 program's profile has been raised through a combination of low interest rates along with its extended durations and competitive loan terms.
Changes to the debt refinancing rules have played a major role in the program’s recent gains, said Jeff Scott, president of SBA lending at the $11.3 billion-asset Merchants Bancorp in Carmel, Indiana.
Now, with the prospect of multiple interest rate hikes on the horizon, borrowers are eager to lock-in long-term financing, creating even more demand for 504 loans, so Merchants “fully intends” to increase its 504 lending, Scott said. “Expanding the credit box, making easier to refinance debt has been a huge driver."
Seedcopa has been working to educate both lawmakers and its small business clients about 504’s funding issues, Robbins said. The situation “is especially concerning, given the amount of time the program could potentially be unavailable for small businesses during an economically uncertain time,” Robbins said.
