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Better way to borrow Featured

9:56am EDT December 27, 2005
If your company is looking to purchase new facilities or make improvements, you might want to look to the Small Business Administration’s 504 loan for help.

Core-Tech Inc., a manufacturer of ceramic cores for use in investment casting, sought this long-term, fixed-rate loan to finance the purchase of two new buildings for expansion.

“You’ve got other SBA loans for start-up and other things, but this is just for real estate,” says Core-Tech president and founder James Corbett. “We started in a 6,000-square-foot rental facility in Cleveland with four employees. Now we have 65 people and about 50,000 square feet (in Mentor). We are very pleased with the (loan), and it certainly has helped us.”

The SBA 504 loan can be used to purchase land, buildings and long-term machinery and equipment, or for renovation projects including street improvements, parking lots, utilities, landscaping or renovation of existing facilities.

The loan is used as a tool for economic development within a community, and qualified businesses usually must create or maintain one job for every $50,000 borrowed, says Tom Thielman, executive director of the Mentor Economic Assistance Corp. (MEACO), one of 270 Certified Development Companies (CDCs) nationwide.

A CDC is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private sector lenders to provide financing to small businesses. Each CDC generally has a review committee to determine eligibility and ability of a company to pay back the loan.

Only specific businesses qualify for 504 loans, Thielman says. Eligible businesses must operate for profit and have a net worth of less than $7 million as well as average net profits of less than $2.5 million after tax in the last two years.

Thielman and Corbett agree the SBA 504 offers significant advantages over other conventional loans.

“Typically, what makes an SBA 504 loan attractive to the consumer is that they have a lower owner equity injection in a project formula,” Thielman says. “We also provide a fixed rate and longer terms — as high as 20 years. Also, our interest rates are below market.”

Corbett says the fixed rates will help his company plan financially by eliminating any guesswork. Long terms also make the monthly payments lower.

The SBA 504 loan has three components. First, a private lender, or bank, makes a conventional loan for at least 50 percent of the cost of the project. The SBA then guarantees up to another 40 percent. Borrowers can get the loan by putting as little as 10 percent down.

With other loans, most banks will lend only 60 percent to 70 percent of the appraised value of the project, says Thielman, leaving a business to front 30 percent to 40 percent of the cost, plus any soft costs.

Most CDCs require the company to get approval from a private lender before submitting a 504 application to the SBA. If the private lender agrees to participate, it will interim finance 90 percent of the project. Once the SBA approval comes through, 40 percent will be returned through the CDC to the private lender.

Throughout the process, the CDC will help fill out applications, monitor required paperwork and coordinate the process. The SBA Web site has a complete list of CDCs by state.

Also, most banks are well-versed in the specifics of the 504 loan and can help you through the process if there is not a CDC in your area.

HOW TO REACH: Core-Tech, www.core-tech-inc.com; MEACO, (440) 974-5739