Long Island companies took out $241.6 million in small business loans guaranteed by the Small Business Administration in FY 2018. This makes it one of the most active regions in the country for SBA lending, but Long Island lags other regions when it comes to a specific type of SBA loan – something local SBA leaders would like to change.
The SBA offers a number of financing options for small businesses that are creditworthy but do not qualify for a conventional loan. The SBA 7(a) loan, which can be used for just about any business purpose, has fixed and variable rate options and accounts for the vast majority of the agency’s total lending volume. But the lesser-used 504 loan, which is a long-term, fixed-rate product, is a key option for businesses looking to purchase real estate or other fixed assets, according to Beth Goldberg, director of SBA’s New York District Office, who leads the agency’s programs on Long Island.
While a 7(a) loan maxes out at $5 million, a 504 loan can go up to $12.5 million, and the borrower may only have to put down 10 percent.
“For the second year in a row, the New York District SBA Office guaranteed more loans than any other office in the country, and for the second year in a row, we guaranteed less 504 loans than many of the other top districts in the country,” Goldberg said. “We are hoping that due to a confluence of factors, we will see an increase in interest in 504 loans this year.”
For starters, the SBA in April increased the term of 504 loans from 20 to 25 years.
“This gives small businesses an extra 60 months to pay off, say, their real estate acquisition, which makes their monthly payment lower and helps their cash flow,” Goldberg said.
Since the longer term was introduced, the SBA has guaranteed $1.1 billion in 504 loans nationally, according to Bill Manger, associate administrator of the U.S. Small Business Administration Office of Capital Access, who visited Long Island last month to discuss the agency’s priorities with more than 80 small business owners, lenders and other stakeholders.
In addition to the longer term, Goldberg expects that the rising interest rate environment will “make the fixed-rate, long-term aspect of the 504 loan more attractive to people who are looking to finance real estate or other fixed assets.”
Thirdly, “what’s happening in the New York market is, we’re seeing space in traditional office buildings being converted to commercial condos and co-ops,” Goldberg said. “Some of these units in Manhattan are priced at $8 million, $9 million or $10 million, which is right in our sweet spot for 504 loans.” She added that 504 loans are only for owner-occupied real estate, not investment properties.
“We are planning to get the word out through real estate trade organizations, so that real estate brokers can be aware of this loan program for owner-occupied buildings, so they can advise their clients,” Goldberg said.
Part of the hesitation toward 504 loans is that they seem more complicated and have more paperwork than a 7(a) loan, because they involve three parties – the borrower, who puts down a minimum of 10 percent; a bank or other lender, which finances 50 percent of the project costs; and a community development company, which works with the lender to coordinate and structure the financing and provides the 40 percent SBA-backed portion.
“The loan structure is a little more complex,” Goldberg said.
“We can all strive to be a little better at providing businesses with information on the 504 option if, for instance, they are renovating or constructing new facilities or looking to purchase heavy machinery,” said Chris Giamo, who is head of the commercial bank at TD Bank, which is the largest SBA lender in term of units in New York and many other states.
In general, Giamo said, “we are very committed to SBA products, which are a great opportunity to bring capital to more businesses.”
Much of the growth in TD Bank’s SBA lending has been in smaller loans – for those under $250,000 and especially under $100,000, Giamo said.
“We are the No. 1 SBA lender in units in our 14-state footprint, with 4,282 loans for FY 2018,” Giamo said. “That is a 33 percent increase in units for us year over year.” The bank lent $411.6 million in 7(a) and 504 loans in that span, or about $96,000 per loan. In New York, TD lent $117 million in 1,210 SBA loans, or about $97,000 per loan.
“We are more focused on growing the number of loans, which means we touch more businesses,” Giamo said. “Many of these loans are to businesses with revenues of $5 million or less. Many of these companies have not been in business long enough to qualify for a conventional loan, or they may not be able to make as much of a down payment.”
Giamo added, “We strive to be a trusted adviser, to provide clients with expert advice on both SBA and non-SBA products, to help them meet their goals and objectives.”