People love to complain when government throws money at a problem: You’re spending my tax dollars … we pay too much as it is … don’t bail out others at my expense. But when the government steps up to help small businesses grow in a community, it’s harder to argue that economic-recovery money is being wasted.
U.S. Sen. Mary Landrieu is leading the charge, legislating to increase Small Business Administration loan guarantees used for buying real estate, buildings and related assets. The Blue Dog Democrat from New Orleans also urged the creation of a secondary-market-guarantee program to give lenders involved with the 504 loans more liquidity that can go toward still more loans; the SBA made that official in late October.
Further, she wants to increase the maximum 504 loan to $5.5 million, up from a maximum of $1.5 million, something that President Barack Obama has supported.
There have been complaints that the recent push to augment the lending recovery is too little, too late for companies that have been struggling since credit markets froze last year. Still, the SBA says banks involved in the agency’s guaranteed lending have disbursed $13 billion since mid-February and raised weekly loan volumes to nearly 75% of pre-stimulus levels.
The SBA received $375 million in stimulus funds partly to eliminate fees on 504 loans, meaning a business can save thousands of dollars on top of the long-term, fixed-rate appeal of the deals, making expansion that much more attractive in a recessionary climate. Locally, though, few companies have taken advantage of the savings, despite economic success that defies the national trend and puts Baton Rouge near the top of so many business-friendly regional ratings.
Reginald Harley, lead lender relations specialist for the SBA’s Louisiana District Office in New Orleans, says post-stimulus 504 loans in the state total about 30, with just two in the Capital Region. “It is paltry,” he says. “There are many other states where 504 loan production is much higher. Here it hasn’t caught on.”
With such a loan, a business puts down 10% to purchase land or buildings for expansion, pay for roadwork or landscaping, or fund other physical improvements. A private lender puts down 40%, and a federally insured Certified Development Company puts down 50%.
Harley says in commercial real estate, banks focus on collateral more than a federal guarantee and might not factor in a 504 loan’s worth, even though in parts of the country, banks prefer to have the extra protection that comes with SBA backing. “In metro Atlanta,” he says, “you see a great deal of 504 loans.”
Andre Fruge, president of Louisiana Capital in Lafayette, says his CDC does some business in Baton Rouge. His typical loan would be around $450,000, and with fees of 1.5% that the SBA’s stimulus boost takes care of, a company could save almost $7,000 on the transaction. Then, with a fixed-rate, 20-year 504 loan, a borrower could focus on paying down the adjustable-rate portion.
“Nobody would say, ‘Let me hurry up and buy a building because there are no fees,’” Fruge says. “But it’s more affordable now than it was six months ago. Our rates are so low right now … about 5.6%. That’s as cheap as we have been in our history, since I’ve been doing this, which is 15 years. It’s an incentive.”
Buck Gladden, president of Gladden Sales, recently went through Fruge’s CDC to expand his sales operation on Perkins Road. Gladden’s company makes Glad Tags, plastic safety markers for petrochemical scaffolding that come in five languages and ship to eight countries, he says.
“We were busting at the seams at a place that we were renting,” he says. “It wasn’t a whole lot more for the note than the rent that we were paying.” So, he went from under 2,000 square feet to 6,500 of warehouse and office space.
The SBA contribution came with a prepayment penalty but a lower interest rate than he could have found elsewhere, he says, allowing him to focus on paying off his 10-year Hancock Bank loan first.
Chet Simpson, owner of Simpson’s Service Center on Florida Boulevard and two gas station-convenience stores, says he is considering a 504 loan to build another mini-mart in the Gardere Lane area near LSU’s South Campus, an area he views as ripe for development, including Pinnacle Entertainment’s planned casino resort, and increased traffic.
Already an owner of 2 acres there, he says he went through the SBA to establish his Florida Boulevard shop after operating on North Boulevard; he is looking into having Louisiana Capital refinance the new $2.5 million-to-$3 million project early next year.
“If you get approved for a loan right now, all of the closing costs are waived,” Simpson says. “In the last loan, it was probably $25,000’s worth of closing fees with origination points.
Landrieu is chairwoman of the Senate Committee on Small Business and Entrepreneurship. Despite a lack of local interest in the 504 loan program, her office says the stimulus boost will expire soon, and merits more funding.
Richard Carbo, deputy press secretary for the senator in Washington, D.C., says another $479 million directed toward the program would support $4 billion in 504 loan activity for business expansion. Nothing specific was pending for that idea in early November, but Carbo says Landrieu is working with Republican Sen. Olympia Snowe of Maine on combining their similar legislation regarding 504 loans and other SBA programs.
