SBA Opens Another Door for Small Businesses to Get Financing for Expansion

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The U.S. Small Business Administration's (SBA) 504 loan program is getting another boost from a new secondary market stimulus program announced earlier this week by the SBA. The SBA just created a secondary market guarantee program for SBA 504 first mortgages. This new program, funded through the American Recovery and Reinvestment Act, will encourage sales into the secondary market of the first mortgage portion of 504 loans made by commercial lenders.

SBA 504 loans are a unique collaboration between organizations certified by the SBA to provide government-guaranteed loans – Certified Development Companies (CDCs) – and commercial lenders. A commercial lender provides a first mortgage for 50% of an SBA 504 project, a CDC finances up to 40% of the project and the borrower typically contributes 10%. 504 loans provide long-term, fixed rate financing for commercial real estate and capital assets. These government-guaranteed loans are typically used by expanding small businesses that are purchasing or enlarging facilities and adding jobs to their communities.

The economic recession and the disruption in the credit markets has resulted in a significant decline in secondary market activity for 504 first mortgage loans and have made some lenders wary of adding any further commercial debt to their balance sheets. This new secondary market guarantee program will provide greater liquidity for lenders that will translate into expanded access to capital for small businesses. The National Association of Development Companies (NADCO), the trade association of the country’s CDCs applauded the move as one that will go a long way toward making small business lending attractive again to banks across the country.

Under the new program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15 percent of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. First mortgages eligible to be pooled must be associated with a 504 loan disbursed on or after February 17, 2009. The program expires on February 16, 2011, or when $3 billion in new pools are created, whichever occurs first.

NADCO Vice Chair, Joe Wolfe from Wisconsin Business Development Finance Corp., noted that the commercial lenders in NADCO’s Lender Advisory Council have been voicing concerns this past year over their inability to sell 504 first mortgages leaving them with less capital to re-lend to small businesses. “This is welcome news to those lenders who could not add any further commercial debt to their books. They will again have an outlet for selling their 504 first mortgages allowing them to come back to fund more. In fact, this new secondary market guarantee program comes at a critical time for our industry. SBA 504 loan applications are beginning to rise again and this will make 504 projects more attractive to our bank lending partners, and we need all the 504 banking partners we can get.”

The SBA 504 loan program has funded nearly $40 billion in loans to growing small businesses over the past 23 years.

About the National Association of Development Companies (NADCO):

Created in 1981, the National Association of Development Companies is the trade association for America’s Certified Development Companies (CDCs). Certified by the U.S. Small Business Administration, CDCs are community-based economic development organizations that serve their local communities and states, and are dedicated to the promotion of small business expansion and job creation through SBA’s 504 Loan Program. In addition to the 504 program, many CDCs also provide small businesses with access to other Federal, state and local economic development loan programs. These programs provide both long and short term funding for borrowers.

Based in the suburbs of Washington, D.C., NADCO provides legislative and regulatory support for the 504 Loan Program on behalf of CDCs, the program’s lending partners (including first mortgage lenders, attorneys and others allied to the industry), and 504 small business borrowers. For more information, please call (703) 748-2575 or visit http://www.nadco.org.

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