Growth Stimulus

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The SBA recently reintroduced its 504 Refinance program, which many believe will provide added capital for small businesses to grow

Story by Rick Berg

Green Bay-based WG&R Furniture has had an extended period of growth dating all the way back to the 1960s, but especially so over the past decade.

During that time the company opened new WG&R stores in Sheboygan and Fond du Lac; rolled out the Furniture Plus brand with stores in Wausau, Wisconsin Rapids and Stevens Point; added WG&R Sleep Shops in all its stores; and created the August Haven furniture specialty section in its Green Bay store.

That growth could have slowed considerably during the financial crisis of 2007 to 2009, when traditional business loans all but dried up, but WG&R President Jim Greene was able to use the U.S. Small Business Administration’s pilot 504 Refinance Program to refinance some of the company’s existing debt, freeing up capital for continued expansion and growth.

“There’s no question that lack of access to capital at that time would have been a huge constraint on our growth,” Greene said.

The 504 refinance program had been introduced as part of the Small Business Jobs Act of 2010 to help small businesses get access to capital, but it was allowed to expire in 2012. In those two years, nearly 3,000 small businesses applied for a total of $7 billion in refinancing.

“It was a pilot program that was designed to provide short-term relief through the downturn,” said Chris Allen, vice president of business services for Appleton-based Fox Communities Credit Union. “The 504 program itself has been around in various forms since the early (1980s). Historically the SBA 504 program was for ‘new money’ loans, as the program was designed to generate economic growth, with a strong focus on job creation.

“During the economic downturn, Congress authorized the SBA to expand this program to include refinancing of existing debt as a primary purpose of this program. This allowed financial institutions to partner with the SBA to restructure existing debt for small businesses and, in many cases, provide them with the cash-flow relief necessary to keep them viable through the downturn.”

Greene noted it as an appropriate act of government intervention.

“There is really no better way for government to help small business,” Green said. “The program reduced bank exposure, but it still required good underwriting, so it didn’t create winners and losers. It also ensured that the capital access created would be reinvested into the organization.”

Designed to free up capital

Though implemented more as a temporary emergency measure in the wake of the recession, the 504 Refinance program was relaunched as a standard, more permanent program late this past June.

“The reason SBA has historically not wanted to use the program to refinance existing debt is that they didn’t want to become a dumping ground for bad loans, thus shifting the risk from the financial institution to the taxpayer,” Allen said. “What we saw from the first incarnation of the 504 Refinance option was that, if structured properly, using the 504 to refinance existing debt can be a safe and effective tool. We now have several years of data to support that the loans made under this program a few years ago are good performing loans. Thus the reason they brought it back again.”

“The program was really set up to allow borrowers to access the equity they had in fixed assets, such as equipment and real estate, to provide liquid capital, while minimizing the bank’s risk,” said Jason Monnett, vice president and senior loan officer in the Oshkosh office of Wisconsin Business Development Finance Corp.

Wisconsin Business Development – one of the SBA’s leading certified development companies in the country – helped with 140 refinance projects during the 2010-2012 iteration of the program, for a total of about $140 million in loans. Allen said Fox Communities’ experience was more limited last time, but he expects more participation this time around.

“With the first incarnation of the 504 refinance program, the window for participating in the program was very short because by the time they had the proper rules in place, there was only about a year to participate and we just didn’t have any projects that fit the mold at that time,” Allen said. “I do have a lot of experience with traditional 504s, though, and the small businesses that participate in the program are generally very satisfied, as the program is designed to provide favorable financing for a longer period of time than is generally available in the marketplace.”

Monnett agreed that the 2010-2012 program took a while to get ramped up, largely because of the time required to establish rules and requirements. This time around, the rules are well established, he said.

Mark Maurer, vice president of business banking for Manitowoc-based Investors Community Bank, said he expects the 504 Refi program to be utilized more this time around.

“It did get off to a slow start last time around,” Maurer said. “There was some activity but not the activity everyone expected, but then it expired. The bugs have been worked out,”

Program benefits some more than others

Aside from meeting the basic requirement – owner-occupied property, loan being current for at least a year – some businesses will fit the profile of a good 504 refi candidate, said Steve Leaman, vice president of business banking at Horicon Bank in Fond du Lac.

“I think the best opportunities are customers or prospects that have mortgages or equipment loans coming due in the near future, or those that have variable rate loans that could use the benefits of the 20-year or 10-year fixed-rate options,” Leaman said. “These fixed-rate options can help mitigate future interest rate risk while often producing immediate cash flow savings, which in turn should help allow businesses to further grow and expand. Access to capital is paramount to the small business owner, and for many borrowers the long-term fixed rates from the 504 program can have significant positive impact on the bottom line.”

Allen agrees the program will benefit some businesses more than others.

“There are two small business profiles that I think would benefit the most,” Allen said. “First, is a small business that has good growth prospects, but whose debt on their real estate or large equipment may not be structured correctly. The 504 refinance option will allow them to restructure their debt and provide some cash-flow relief so they can implement their growth strategy more effectively.”

“The second profile would be a small business that has a lot of equity tied up in their real estate or large equipment and need working capital to help with growth,” Allen added. “The 504 refinance option will potentially allow them to gain access to this working capital and get the cash resources they need to execute their growth strategy.”

Maurer said the ideal candidate for a 504 Refi loan is “a fast-growing company that needs to restructure its debt and preserve its capital.”

“The simplest and easiest way to finance a project is with a three-year balloon loan, but simplest and easiest isn’t always the best,” Maurer added. “There is more work involved with a 504 Refi loan, but it’s not onerous. And in the end you get a loan with long-term committed financing that’s very cash-flow friendly and recession-friendly.”

Getting started

Most conversations about SBA’s 504 Refinance program will likely start with the company’s business banker, but will also likely include expert assistance from a certified development company such as WBD Finance.

“I think it’s important to start having the conversations today,” Leaman said. “Even though the program has now been made permanent, there are limits to the funds that are available. I think it’s important to sit down and take a look at their existing structure and to lay out the costs and the benefits of the program. What’s also interesting, unlike the traditional 504 loans, there are ways to include other business expenses, so it’s worth taking a look at the full picture to see how impactful a 504 refi could be.”

Monnett said the SBA has a 504 Debt Refinance Checklist that business owners can access “to make it easy to identify when a project is 504 Refi ready. Simply go down the list then make sure you can say yes to all of the applicable answers.”

Beyond that, he said, the business should work with its business banker and CDC to gather the documentation necessary.

“I think the program will ultimately become a very nice tool for small businesses and small business lenders,” Allen said. “There are a couple of new requirements for the program that put a little more restriction on the use of funds, so this will hamper its efficacy initially, but the industry is voicing their opinions on what restrictions are not necessary and will limit the ability of the program to help. I’m confident SBA will take this feedback to heart and refine the program over the next few months and years, ultimately getting to a point where the program is another great SBA option for helping small businesses grow their impact on our economy.”

Maurer said the program’s best value is “helping a company structure its balance sheet for the long term. Instead of putting 20 to 25 percent of the capital into a project, it’s 10 percent. That preserves the capital of the company and that’s what’s needed to survive in today’s business world. There are always challenges. Whether the economy is doing well or not so well, there are always going to be curveballs being thrown at a company. This can help navigate them through those tough times.”

As a business owner, Greene said his experience suggests that the program can provide a significant boost for a growing company.

“I recommend it,” Green said. “It allows your bank to give you some additional lending capacity and allows you to borrow at a reduced rate, which can give you the ability to use that capital to continue your growth. The only drawback is that there is a little less flexibility in terms of adjusting the amortization schedule later on, but that’s offset by the favorable rates and the greater access to capital.” 

Rick Berg is a freelance writer and editor based in Green Bay.