There is broad agreement that growth in manufacturing is critical to the nation’s economic recovery. A number of recent measures are giving the sector a much-needed boost. One initiative in particular, the Small Business Jobs Act, has made investing in property ownership and refinancing current holdings more affordable and accessible to small manufacturers. This is possible through new provisions in the Small Business Administration (SBA) 504 loan program.
If the first 12 months since the Jobs bill was passed last fall are an indication, the new SBA 504 opportunities promise a more positive outlook for manufacturing in the US. Loans to manufacturers for commercial real estate purchases made up 14% of TMC Financing’s total loan volume for fiscal year 2011, which ended September 30, 2011. Owners of manufacturing businesses are showing renewed confidence and do not want to miss out on the SBA 504 program’s below-market, fixed-rate financing.
The SBA 504 loan program provides up to 90% financing for the acquisition, renovation, or construction of commercial property, and, for the first time ever, debt refinancing. The program is quickly gaining popularity among owners of manufacturing businesses. By purchasing a building rather than leasing it, a business owner can protect against fluctuations in rents, and, in many cases, save money with a monthly mortgage payment lower than current rental rates.
SBA 504 loans enable the business owner to purchase commercial real estate or refinance up to 90% of existing commercial real estate debt with as little as 10% down, using below-market, fixed-rate financing. The SBA 504 loans are structured with a first mortgage from a conventional lender, and a second mortgage from a Certified Development Company (CDC), such as TMC Financing, backed by the SBA.
The breakdown is generally 50% from the lender, 40% from the CDC/SBA, and 10% from the borrower. Conventional loans usually require 25% down, making SBA 504 financing an attractive option for business owners who are intent on cash preservation.
One of the business owners who TMC has helped to benefit from the SBA 504 loan program is Arturo Alfaro, founder and president of ACC Precision Inc. (Oxnard, CA), a successful metal parts manufacturer. With the loan he secured, Alfaro purchased a building, which has enabled him to increase efficiency, expand the business, and add jobs. "Manufacturing has been challenging," he says, "but we have been busy all along, and buying our building gave us the room we needed to grow."
The Jobs bill enhanced the 504 loan program to make more businesses eligible, and increase loan amounts. There is no cap on the amount of the first-mortgage loan provided by the conventional lender. The second-mortgage SBA 504 cap increased from $2 million to $5.5 million per project for manufacturers. These loans are now available to those businesses with up to $15 million in net worth and $5 million in average net income.
For example, an owner could purchase a $13.5 million property with $1.35 million down, a $6.65 million (50%) conventional bank loan and an additional $5.5 million (40%) fixed-rate CDC/SBA 504 loan. These provisions have enabled TMC and other CDCs to provide larger loans to a wider array of businesses in the manufacturing industry.
Owners of the leading manufacturer and distributor of outdoor gear, Armen Kouleyan and Harry Kazazian of Exxel Outdoors Inc. (Haleyville, AL), took advantage of the benefits of SBA 504 financing this year when they purchased three buildings to expand their business operations with an $8.5 million SBA 504 loan from TMC Financing.
Many business owners who purchased property at the height of the market now face the daunting task of refinancing a property that has decreased in value. One of the most innovative, yet temporary, provisions of the new SBA 504 program is debt refinancing. Business owners can use low-interest, SBA-backed loans to refinance existing, non-SBA, underwater commercial mortgages with 90% financing on the entire appraised value. SBA 504 debt refinancing is only available for a limited time.
To those not familiar with SBA loans, regulations can appear complex. A Certified Development Company can guide buyers through the process and help to secure commercial lenders, enabling small manufacturers to access credit, grow their business, and produce jobs for American workers. ME
This article was first published in the December 2011 edition of Manufacturing Engineering magazine. Click here for PDF.