What to Do if You’re Waiting Now or Will Need a Loan Soon
LSL CPAs heard of this long-standing loan program’s situation and the effect on borrowers who have to wait for their money. We turned to long-time friend Matt Davis, President of Southland Economic Development Corporation, to give our readers some ideas on how to proceed now and what they might do to prepare for their future.
Here’s what he told us:
In the 63-year history of the CDC/SBA 504 (Certified Development Companies/Small Business Association) loan program covering commercial real estate-related and long-term machinery and equipment loans, it has never run out of money. Until now. And although Southland Economic Development Corporation and its association partners warned Congress and SBA leadership, they didn’t respond in time. This particular program was funded at $7.5 billion for its fiscal year ending September 30, 2021. The $7.5 billion was gone as of September 7, 2021, twenty-three days before the next year starts.
The funding will be available again on October 1, pending congressional approval of a “Continuing resolution.” While the CDCs (Certified Development Companies) like Southland are still accepting loan applications for the next fiscal year, there could be delays: We are never sure of anything these days.
We have some recommendations for:
- People waiting in the gap—conditionally approved loans, but no money
- People who want to apply for these loans, even in the face of the unknown.
- People who would like to make sure it doesn’t happen again
Waiting in the gap? Here are some alternatives for RIGHT NOW
If you have funds trapped “in the gap,” and the real estate purchase deal is at risk of falling through, we offer these immediate solutions that will also serve as contingency plans for later.
- Ask the seller for a little more time. Can they extend the escrow and postpone the closing until after October 1? If not,
- Call your regular banker (see my conversation with Ron Stumpf from last year). Especially if you’ve kept up a good relationship with them during the previous few years, they may be able to help.
- Check with commercial bridge lenders. You may pay more in interest, but you might still be able to close the deal with the seller if they want their money now.
- Feel free to contact a Certified Development Corporation in your area. Here’s a link.
- Write a letter to your congressperson. We have a sample here. This letter will help you feel you are doing something in the short term, safeguarding a loan for your near-future self, and offering a better chance for your fellow business people in the long term.
NOTE: While October 1, 2021, is just around the corner, it’s always a good idea to have a contingency plan. Read through those five suggestions again. You may still need to use them now or in the future.
If you’re looking to borrow money soon, here is information on the SBA CDC/504 loan.
In the last year and a half, the SBA, Small Business Administration, has gained greater notoriety as displaced businesses in this country have sought extra help due to the pandemic. Our company is one of around 200 nonprofit U.S. corporations with a mission to “contribute to the economic development of their communities.” The 2020-2021 pandemic period has been very rough for everyone, and we’ve tried to help wherever we can.
While we have a very active trade association NADCO with a representative in Washington, DC, it was difficult to get anyone’s attention to warn them of the impending shortage of funding for the 504 Loan Program. There’s so much to know about it, and a visit to this Fact Sheet page would help you learn all about this one in particular. There are others. The fact sheet covers the basics of the program, use of funds, eligibility and loan amounts, interest rates, maturity, collateral, fees and much more. Regarding fees—because of the pandemic, the processing and loan fees associated with these 504s were abated. They’re likely coming back effective October 1, 2021.
Conclusion and recommendations to keep it from happening again
The SBA 504 Loan Program, also called the CDC/504 Loan Program, offers lower interest rates than non-government loans and a lower down payment (10%), so they are attractive to borrowers. The reduced down payment (compared to a conventional commercial property loan of 20% or more) leaves the borrower with more working capital to run their business. They are attractive to banks and third-party lenders because they only have to lend 50% of the requested amount and are in the first position should there be any problem repaying the loan. The SBA picks up the other 40%. COVID-19 brought higher demand for attractively packaged loans, and the SBA’s name became more well-known. For those reasons, the CDC 504/loans ran out of funds.
We would love to tell you that the next round of CDC/504 funding will have a higher cap (more than $7.5 billion) available to lend. We’d also like to assure you the application and funding process will be smooth with no hiccups or speed bumps. We cannot. The “Continuing Resolution,” which allows an uninterrupted flow of funds has yet to be voted on in both congressional chambers. It’s possible that could carry us through early December of this year. If “anything” happens (government shutdowns, COVID lockdowns, emergencies of any kind), we might be in the same position as now. No money.
For that reason, having a backup or contingency plan for any eventuality is always wise. Know your business banker on a first-name basis. Keep an eye out for other sources of emergency funds. Write your elected officials, urging them to pay attention to the Small Business Association lending programs. Make sure your financial statements are up-to-date, squeaky-clean, and well organized so any time you need to borrow money from the bank, a bridge lender, or whomever, you’ll be in good shape.
And finally, please reach out to me, Matt Davis.
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We are grateful to Matt for his generosity in keeping our clients up-to-date on the SBA 504 loan program. Hopefully, people who are waiting for their funds might still achieve their goals. We’re here to help, and we appreciate Matt offering his time as well.
A bit about Matt Davis
Matt has been at Southland Economic Development Corporation since 1997. Southland was his second job ever, and it’s not an exaggeration that he actually came up through the mailroom. After interning, he was promoted to loan officer at the tail end of college and then took over the production aspect of the business in the early 2000’s. He has been president since 2011. He is a board member for various nonprofits and vice-chairman of NADCO, the National Association of Development Companies. He is passionate about assisting small businesses and helping them navigate the lending landscape. He can be reached here.