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504 Loan Program: Amid the Bailout, an Investment

Nov 2009

Today's headlines are filled with news about bailouts and rescue programs designed to save America's large industries and provide trickle down benefits to workers and consumers. But what is being done to provide direct assistance to the small business owners that account for over 90% of businesses that operate in Florida and around the nation?

There is a little known program that has been assisting small business owners for more than 25 years - the 504 loan program.

The 504 program is an excellent alternative to traditional small business expansion financing in good times but it is even more relevant in bad times. While many of the rescue initiatives under way focus on ensuring the ongoing viability of large financial and manufacturing concerns, the 504 program works steadily and consistently toward strengthening small businesses everywhere.

Unlike many traditional economic development programs, the 504 program directly creates or retains permanent jobs (one job per $50,000 of 504 funding) that impact local communities throughout Florida.

Last year, Florida First Capital alone provided more than $141 million in 504 financing that assured the employment of more than 1,800 Floridians. Statewide, almost $421 million in 504 financing was provided accounting for more than 6,800 jobs. And nationally, the number was an impressive $5.3 billion in 504 financing creating an estimated 100,000 jobs.

While the federal government is providing assistance to revitalize the national credit markets through direct capital investment in the nation's financial system, there is still a lack of credit availability at the local level. Entrepreneurs, mom and pop shops and homegrown businesses are finding that although current economic conditions afford them unique opportunities for expansion, they are not able obtain the needed capital at affordable terms due to the instability of the credit market.

Although there is inherent risk in the business of finance, banks themselves are becoming more and more conservative in their analysis of the credit applications they review. Financial institutions are under scrutiny from both their boards and investors/shareholders to retain favorable positions and lower lending risks whenever and wherever possible.

The 504 is a natural fit in this regard. Under the 504 program's unique distributed credit structure, the bank gets a 50% loan-to-value first lien position on the assets being purchased -- cutting its risk in half. No other loan program (not a guarantee) offers this type of risk security to a lending partner.

Second, Florida First Capital provides SBA-backed financing up to 40% of the project cost, thus providing liquidity to the program. This portion of the loan is funded from the sale of long-term bonds each month, known as debentures. These bonds carry the full faith and credit of the U.S. government.

Next, the borrower benefits from a long term, below market, fixed interest rate with a down payment as low as 10%. The low down payment (compared to 20-30% traditionally) keeps more needed cash in the business.

504 funds are limited to the purchase of owner-occupied commercial real estate and improvements; construction of new or renovation of existing facilities; and/or the purchase of long-life machinery and equipment. After all, it's better to own than rent.

Borrowers also must be for profit and meet the SBA's definition of “small.” That means the company's tangible net worth cannot exceed $8.5 million and its net profits after tax (two-year average) cannot exceed $3 million.

The 504 program exists to make affordable credit available to America's small business owners. Equally important, it is an investment in the backbone of the economy which creates small business jobs that help build and support local economies and communities - all at a zero cost to the taxpayer.

For more information on FFCFC and its 504 loan program, visit www.ffcfc.com, email us at insider@ffcfc.com or call 888.320.5504.