Loans: Long Live The 504

A loan program rediscovered

When the Small Business Administration temporarily suspended its popular 7(a) loan program early this year, entrepreneurs took a fresh look at its often-forgotten stepsister, the 504 loan. Many liked what they saw. "When the 7(a) deals fell off the table, a lot of people got into the 504 program," says Chris Lehnes, vice-president at CIT Small Business Lending in Livingston, N.J. In the first five months of 2004, the SBA backed nearly 5,000 of these loans, a 29% increase over the same period last year. At Bank of America, 504 lending is up 40% in the first half of this fiscal year. "We're seeing more 504 activity nationally than the highest levels in history," says Benito Almanza, BofA's head of government lending in Phoenix.

The 504 loan program is designed to help healthy small businesses looking to expand. It can also be used by seasoned entrepreneurs or those with industry experience who want to buy a business. Proceeds from a 504 can generally be used for fixed assets with a long life, such as land, buildings, or machinery.

A 504 is really two loans. The first, from a bank, is usually for 50% of the loan amount. A further 40% comes from a nonprofit community development corporation (CDC). The borrower puts up the remaining 10%, hence the common shorthand 50-40-10. Russell Dye, vice-president at Commonwealth National Bank in Worcester, Mass., calls the 504 "maximum financing while preserving working capital for growth." The bank or the CDC will coordinate the loans.

Last winter, after Carol Benesch's pending $1.2 million 7(a) loan fell through, she thought her hopes of buying a kennel and dog-grooming business in Norwich, Conn., had been dashed. But Benesch had spent 12 years working at another kennel and had also co-owned a business, a history that made her eligible for a 504. She eventually secured a smaller $560,000 7(a) loan and a 504 for $891,000, then bought the Norwichtown Pet Resort & Spa in March.


Benesch didn't need to take advantage of what may be the 504's biggest draw: its size. Small businesses can borrow up to $5 million, while the 7(a) is capped at $2 million. Some entrepreneurs, such as exporters, those in rural areas, and veterans, can borrow about $300,000 more in subsidized funds and may also enjoy tax advantages. The loans are funded by fees, so they aren't subject to the budget shortfalls that have tripped up the federally funded 7(a) program.

The 504's large loan amounts, together with recent low interest rates, have been a boon to entrepreneurs faced with sky-high real estate prices. Walter (Gus) Frick, owner of Incase in Hopedale, Mass., has seen a jump in sales of the cases -- for hearing aids, pens, and watches -- that his company makes. Good news, except that a clause in his lease raised his rent when sales, currently about $8 million, rose. He was going to have to take a hit of $10,000 to $20,000. Instead, he used a $1.35 million 504 loan to buy the space Incase had rented. He's leasing part of the building to another company. "It has given us some security and an income stream," Frick says of the 504. Pretty good for a forgotten stepsister.

By Jill Hamburg Coplan

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