The Small Business Administration’s 504-loan program could fall victim to its own success again, as some participants fear a second shutdown is on the horizon.
Last year, the 504 program, which provides small businesses with long-term financing for commercial real estate and heavy equipment purchases, credit limit reached Early September, resulting in it having to close by the start of the federal government’s fiscal year 2022 on October 1. This year, it’s about to exhaust its lending authority “as early as June,” more than three months before fiscal 2022 ends, according to Rhonda Pointon, president and CEO of the National Association of Development Companies, a Washington-based trade group that represents certified development companies engaged in 504 lending.
“Last year, the program exhausted its approval stage before the end of the fiscal year, in September, and this is the first time in the program’s 40-year history that this has ever happened,” said Brent Swanson, president of 504 Capital Corp. in Chesapeake, Virginia, said. “The difference this time is that the approved cap hits its limit much earlier in the fiscal year. So that would be a lot worse for everyone involved.”
NADCO and program insiders are urging Congress to step in and increase lending to help 504 — which is seeing record lending volume — avoid disruption. “NADCO’s mission is to work with Congress to ensure small businesses … have uninterrupted access to the capital they need,” Pointon said.
The SBA has taken several steps in recent years to make 504 more attractive to borrowers. It Extension of the maximum loan term to 25 years in 2018, up from the previous 20-year limit. Also, the rules for refinancing existing debt in 2021 have been relaxed. But these changes may have been too successful. Though it’s long been the smaller of the SBA’s two major lending programs, 504 has seen explosive growth over the past five years. Even after closing in September, lending was a record $8.2 billion in fiscal 2021, up from $5 billion in fiscal 2017.
Last year, the program maxed out its approval stage before the end of the fiscal year… That would be far worse for everyone involved.
Brent Swanson, President of 504 Capital Corp.
There is no question that the momentum of the program has carried over into fiscal 2022. As of Feb. 4, total loan volume was $3.82 billion, up 60% from the same four months in fiscal 2021.
In contrast, as of February 1, the SBA reported total lending volume of 46.6 billion and $36.5 billion for the full fiscal year 2021.
SBA 7(a) loans, which can be used for business acquisitions, working capital and small equipment purchases, are made directly by banks. The agency acts as guarantor. The structure of 504 loans is more complicated. Banks and other lending partners fund 50% and hold a senior lien position. Certified development companies provide 40%, with the borrower usually responsible for the rest. As with 7(a) loans, the SBA acts as guarantor and guarantees up to 85% of 504 loans.
Now that Congress passed a new rolling resolution to fund the government through March 11, NADCO and other 504 participants are hoping the five-week pardon will give lawmakers the time they need to enact a permanent budget create that includes increased lending authority for the program. which is currently capped at $7.5 billion for most loans (certain 504 refinancing loans are funded from a separate budget).
“As always, we remain optimistic that Congress will recognize the importance of the SBA 504 program and take action to prevent disruption,” said Sherwood Robbins, executive director of Seedcopa, a certified developer company based in Exton, Pennsylvania. Robbins also serves as the regional director for NADCO.
The SBA “works with industry, [Office of Management and Budget] and The Hill to ensure that adequate credit authority is provided for our business lending programs,” said spokeswoman Shannon Giles.
Both Robbins and Swanson said their companies set records for 504 loans in fiscal 2021 and are on track to break them in fiscal 2022. As of January 31, 504 Capital reported total lending to 504 programs of $41.3 million, up from $11.1 million a year earlier. Seedcopa reported $17.7 million in total volume as of the same date, up 145% year over year. According to Robbins, the 504 program’s profile was raised by a combination of low interest rates along with its extended terms and competitive lending terms.
Changes in debt refinancing rules have played a major role in the program’s recent gains, said Jeff Scott, president of SBA lending at $11.3 billion Carmel, Indiana-based Merchants Bancorp.
Now, with the prospect of multiple rate hikes on the horizon, borrowers are scrambling to secure long-term funding, creating even greater demand for 504 loans, so Merchants has “full intentions” to increase its 504 lending said Scott. “Broadening the credit box and making it easier to refinance debt has been a big driver.”
Seedcopa has been working to educate both lawmakers and its small business customers about 504’s funding issues, Robbins said. The situation “is particularly concerning given how long the small business program could potentially be unavailable during an economically uncertain time,” Robbins said.