By Gabe Beukinga
Senior Vice President-SomerCor 504
The Small Business Administration recently finished its fiscal year, and it was a record year on most all accounts. During fiscal year 2012, more than $1 billion in SBA loans were approved for small businesses in the State of Illinois alone. This represents a substantial increase over 2011.
The impressive results in 2012 can be attributed in great part to business’ appetite for attractively priced alternative financing options and the success of a two-year refinancing initiative that was part of the SBA 504 Loan program.
At the same time, since the end of September a powerful misconception has emerged and lingered in the market. There are people—small business owners and those who advise them — who believe that the Small Business Administration no longer is funding transactions — that it is closed for business.
That couldn’t be farther from the truth.
Let’s clarify the state of small business lending as we close out calendar 2012 and look ahead to 2013.
Two years ago the Jobs Act of 2010 was ratified to provide small businesses with greater access to capital to invest in fixed assets. Through the SBA 504 lending program, small businesses finance the purchase, construction and renovation of commercial real estate (as well as the acquisition and installation of heavy machinery and equipment) through long-term, government-guaranteed loans.
The Small Business Jobs and Credit Act of 2010 enhanced the existing SBA loan program with three significant changes:
- Greater access — To qualify for a 504 loan, the tangible net worth of a company was increased to $15 million (from $8.5 million), while after-tax net income as high as $5 million (up from $3 million);
- Increased loan values — Applicants are eligible to receive between $5 million and $5.5 million in SBA dollars (up from between $1.5 million to $4.0 million); and
- Debt refinancing — Existing debt can be refinanced. Recent modifications removed certain restrictions and meant that refinancing of the debt would be possible regardless of the loan maturity.
The final change — the refinance provision — carried with it an expiration. The end of September brought about the end of the refinancing program.
Yet small business lending is alive and doing very well in Illinois, and across the country. The first two changes to the Jobs Act of 2010 remain in full force today. Those two characteristics, along with the fact that interest rates continue to be at some of the lowest levels ever, make SBA lending as attractive as ever.
In a traditional SBA 504 loan, a bank provides the first mortgage at 50 percent of the eligible financing, a Certified Development Corp. (CDC) like SomerCor provides a second mortgage equal to 40 percent of the eligible financing, and the borrower puts 10 percent down. Conventional lending often calls for 25 to 35 percent down in this market, so the out-of-pocket savings is significant.
The current SBA lending programs provide advantages to both banks and borrowers. For banks, it brings exposure down to 50 percent at a time when financial institutions are looking to preserve capital and keep their loan to values at conservative levels. For business owners, rather than putting 25 to 35 percent down for a five-year conventional loan, the business owner can put down just 10 percent, and use the savings for working capital needs.
Additionally, the SBA portion of the 504 loan is a 20-year fixed rate that currently is 3.95 percent.
The three new elements of the legislation will impact business owners in a number of ways:
- This increase in size standard requirements means that middle-market firms have greater access;
- By increasing the amount of money that can be borrowed, the purchasing power of businesses has increased significantly, and the program can be utilized for projects as large as $15 million to $20 million.
Exemplifying the benefits and advantages of the SBA lending program, and the various changes that have taken place over time, is St. Charles-based Tek Pak Inc. Formed in 1992, Tek Pak sells, manufactures and distributes plastic carrier tape and thermoform prototype and production tooling to customers in the electronics and healthcare industries, among others.
Tek Pak Inc. has been the beneficiary of three SBA 504 loans, and is working on another. Tony Beyer, president, said the SBA 504 program has allowed Tek Pak Inc. to continue to expand its operations.
Tek Pak Inc. first used a 504 loan four years ago to acquire its St. Charles facility. Last year, the company used two new SBA 504 loans for equipment. One of those loans led to the purchase of additional manufacturing equipment and the second was used to refinance term debt on other manufacturing equipment.
The company is currently in the process of obtaining its fourth 504 loan in order to acquire a facility in Batavia that it currently leases. This new 504 loan will allow Tek Pak Inc. to continue to make capital expenditures, grow and hire additional employees.
Gabe Beukinga is a senior vice president and team leader for SomerCor 504, a Certified Development Corp. During fiscal year 2012, no Chicago-based CDC approved more SBA loans than SomerCor 504. In FY 2012, Beukinga contributed more than $90 million in SBA lending ranking him among the highest of all loan officers in the country.