The Small Business Association 504 loan program helps small business owners build wealth the same way as homeowners do: by owning space instead of renting it
Being an entrepreneur can be exciting—but in many cases, the flexibility and freedom gives way to never-ending hours and financial stress. For those small businesses that occupy a brick-and-mortar location, that financial stress is often tied to rent.
Business owners have no control over the rise and fall of rental rates, which makes it difficult to capture in a long-term business plan. If they own their unit, however, then financial planning becomes much more manageable.
The Small Business Administration (SBA) 504 Loan program provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets such as property or equipment for expansion and/or modernization. It’s specifically designed for owner-occupied commercial real estate, and it allows small business owners to have control over their destiny.
“It's the perfect opportunity for small business owners to actually create wealth by purchasing their commercial property. Most small businesses will pay a landlord rent for the complete tenure of their business—18+, 20+ years in their business and in the same spot, paying a mortgage to a landlord—and if they would have purchased that commercial real estate, in most cases, that property can be just as valuable as their business by the time their career is over. So we look at it as not necessarily a loan, but as a wealth creation strategy for small business owners,” said Matt Craig, chief marketing officer at Fountainhead Commercial Capital.
504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing 10% of the project costs, according to the U.S. Small Business Administration. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.
Craig says that SBA loans have a history of being slow, cumbersome, and difficult to obtain, but that’s only the case when working with an inexperienced lender or a bank that’s not equipped to handle the needs of a small business. This misconception persists even as the process has vastly improved, and Craig says that’s because of the horror stories and bad experiences that commercial brokers have heard and had in the past. If the right lender is presenting the borrower with information in a timely manner and helping them to understand it, it should barely take more time or effort than dealing with a traditional loan product.
“Banks have given such a bad name to commercial lending,” Craig said. “Once you work with a direct lender, who has that decision power in their hands and doesn't have to go through the bureaucracy and red tape, it can really open your eyes to the fact that it's really not as difficult as you thought it was. A lot of times too, because banks are so risk averse in terms of lending decisions, borrowers assume that they wouldn't be approved, and that's not always the case, either.”
Fountainhead Capital is a non-bank direct lender specializing in SBA 504, SBA 7(a) loans, and they also have a conventional product similar to the SBA 504 product. There are only 14 7(a) licenses in the country for non-bank lenders, and Fountainhead holds one of them. Whereas banks are very risk averse, Fountainhead is the opposite; they try to stay on the cutting edge and they move very fast, sometimes issuing an approval in a matter of hours, not days. This is in stark contrast to commercial bank applications, which can sit in the pipeline for weeks even if they’ve been denied.
Fountainhead is on a growth track, making the 2019 Inc. 5,000 list. They’ve recently launched a new website and are focusing on direct-to-consumer business and digital advertising, but they also have a “massive” network of partners. The majority of their business comes through referrals and intermediaries, or from borrowers and brokers who have a file that was rejected from a bank. Over time, Craig said, they’d like to have an equal share of direct and broker business, with small business owners and commercial brokers alike seeing the company as a valuable resource.
Rather than looking at borrowers as a bunch of numbers on the page, a lender like Fountainhead can really dig into the borrower’s situation in order to understand why their credit score or debts are what they are. Small business owners don’t always know the options that are available to them, which means that their back is against the wall when they get into tough situations.
“Small business owners need cash fast, and they assume that the easiest way to get that is to go to one of those funding sources that can do that in 24 hours or less, but the problem is the interest rates on those are just absurd,” Craig said. “You're looking at a roughly 5-7% on an SBA loan, and a lot of these small business loans that are provided by some of these other funders, the quick money, you're looking at interest rates being in the 30+ percent range. So, it seems like a good idea because you need the money, but at the same time, if you would've spent a couple extra hours with an actual loan specialist from a quality SBA lender, then you could have probably gotten more money for less for less interest.”
Small business owners have a million things to worry about. Financing doesn’t have to be one of them.