Often MI owners don’t have a barrel of spare cash hanging around – their wealth is locked up in the business. So, when there is a need to write a large check, owners need to get creative and ought to consider the U.S. Small Business Administration (SBA) as a resource.
Let’s look at two examples.
Scenario #1: Manchester Music Mill
Let’s say you’re ready to expand your music store by purchasing a new building. Consider an SBA 504 loan which provides fixed rate financing for major fixed assets, such as land and buildings.
SBA 504 loans are made available through Certified Development Companies (CDCs), SBA’s community-based partners for providing 504 loans.
In 2013 Joe Lacerda, owner of Manchester Music Mill, had an urgent need to purchase a building to meet the ever-expanding needs of his customers.
Lacerda obtained an SBA/CDC 504 loan through New Hampshire’s Capital Regional Development Council and acquired a property which doubled his business’ square footage.
He has reaped the success ever since. Lacerda told me that he was paying almost $8,000 a month rent for 6,000 square feet. With his new building he occupies about 12,000 square feet and has a tenant for the remaining space he doesn’t need.
His out of-pocket expense is $5,550 with more than double the space.
I asked Stephen Heavener, the CDC wizard behind the Lacerda transaction and executive director of Capital Regional Development Council, a few questions:
Please tell me about the SBA 504 Loan.
Stephen Heavener: My organization is licensed by the SBA to package SBA 504 loans. 504 loans are 40 percent of real estate acquisition costs, packaged by the 175 organizations like mine (Certified Development Companies) that are sold monthly to institutional investors. The bank provides a 50 percent first mortgage and we provide a 40 percent second mortgage as the servicing agent. The buyer only puts down 10 percent.
Why are most small business owners not familiar with your services?
We don’t market ourselves to the end user because I don’t want a thousand guys calling me for money because you have to be first vetted by the bank. So, you can imagine, if the deal isn’t strong enough, I don’t want to take that call. I want the bank to do the original screening.
Is your program 100 percent government funded?
Some of my money is from SBA – we do a lot of with the Small Business Administration. That’s how we did the deal with Manchester Music Mill. So, depending on the size of the need and where it’s located, we decide which pot of money to use. Although most of the money is federal it is still my responsibility to get it right, because once I borrow the funds it’s my responsibility to make sure the loan is paid back.
Are there subjective factors involved in your decision or is it all about the numbers?
Yes, just like a bank. They have to have good character, you look at their history, you look at them in the eyes and you decide if this person will fulfill the terms of the agreement.
I know your reach is limited to New Hampshire. Where else can music retailers look in other parts of the country?
I suggest that you start with the state economic development organizations in your community and ask them for a list of appropriate organizations. Your traditional banker may also be able to help.
As of June 2018, maximum interest rates for the CDC portion of CDC/504 range from 4.89% to 5.16% including fees.
Scenario #2: When Partners Disagree
Let’s say you’ve had a partner for 25 years. The relationship started out great, but now you have a problem. You want to expand and continue growing your MI business. The dilemma is that your partner is burnt out and he wants to exit. You have a major disagreement. Solution? Buy out your partner. To get some of the cash needed, speak to your local banker about an SBA 7A loan.
In a 7A loan the SBA guarantees 75 percent of the total bank, so if the borrower defaults the SBA (Federal Government) pays the bank off on the difference between what they can recoup, up to 75 percent of the total bank loan.
7A can be used for real estate and other business assets and has a little higher interest rate that includes some SBA fees.
Here’s how 7A fees are applied as per SBA. A $5,000,000 loan (75 percent SBA guaranty of $3,750,000), the loan fee is $138,125 calculated as 3.5% of the first $1 million guaranteed ($35,000) plus 3.75% of the remaining guaranteed amount.
As of June 2018, Maximum interest rates on SBA 7A. loans range from 7% to 9.50%.
One last thought: you’ll need excellent credit scores for both business and personal credit to qualify for an SBA loan from the bank. The bank is going to want to make sure your revenue, and cash flow will be able to service the debt. The best time to prepare for a loan is when you don’t need one.
Speak to your professional advisors for help.
