DO YOU DREAM about owning your own building, but are stymied by the high down payment your banker requires? And once you have the building, are you concerned about how to pay for renovations and soft costs and still have enough working capital left over? Well, you can get a loan to buy that building and land at rates and terms (including 10% down) more like a large corporation would pay.
It’s possible by using the SBA’s 504 Loan program, one of the Fed’s best-kept secrets. These special loans provide long-term (10-20 years) financing to small business for the purchase, construction, and renovation of buildings and can be used to fund large equipment purchases.
Besides the long loan terms, other advantages are a low down payment, typically only 10%, and a competitive interest rate fixed over the life of the loan. These so-called 504 loans are arranged by regional Community Development Corporations (CDCs) who partner with traditional commercial lenders, mostly banks, to provide these long-term loans. Borrowers work directly with CDCs to apply, close, fund and service their loans. A private lender typically provides up to 50% of the funding, the SBA provides up to 40% (up to $1 million), and the business provides 10%.
Here’s how a typical project might be put together:
COST
Acquisition of building — $800,000
Renovations — $100,000
Machinery/Equipment — $50,000
Soft costs — $50,000
Total — $1,000,000 |
FINANCING
Bank: First mortgage — $500,000
SBA 504: Second mortgage — $400,000
Equity — $100,000
Total — $1,000,000 |
Although 504 loans cannot be used for working capital, because of the lower down payment requirements they can help you save funds for later working capital needs.
The 504 program exists to help the community by helping small businesses to create jobs or in other ways benefit the community. You’ll need to document how your project will either create jobs (one job per every $50,000 of CDC dollars) or how it will otherwise benefit your local community. Here’s a list of other eligibility requirements:
- Organized as a for-profit business.
- Legal entity-corporation, partnership, sole proprietor, limited liability company.
Any type of legitimate business — manufacturing, wholesale, service, distribution, professional service or retail.
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- Located in or planning to locate in any area of the United States.
- Small business — meaning, one that has a net worth under $7 million and net profits after taxes of less than $2.5 million, or that meet the SBA’s other size standards.
- Planning to use the loan proceeds for capital investment (land, building, leasehold improvements, renovation, construction, machinery and associated soft costs).
- Another lender must be willing to participate in the financing. The SBA 504 loan finances up to 40% of the total project cost and the other lender finances 50%. The business or its owner typically puts in 10%.
- Owner-user of the project being financed. Two or more unrelated small businesses may receive a 504 loan to buy or construct a building as long as they, together, occupy at least 51% of an existing building or 60% of the new construction.
Concerned about excess paperwork and long time delays? The CDC requires the same basic information that a bank does and offers a timely turn-around on applications. Start by talking to your local CDC officer about your project and your local banker to see if they are interested in participating.
How are they able to offer the lower rates and smaller down payments? SBA 504 loans are pooled together and sold as 20-year bonds to large corporate and financial investors in the New York securities market. It is these bonds, carrying the guarantee of the US government, that enable investors to accept a lower interest rate since they cannot lose their principle. This is exactly the same way giant corporations borrow money from “the markets” rather than their local banks.
For more information, go to the National Association of Development Companies’ website at www.nadco.org. The SBA’s website, www.sba.gov, is also a great source of information about the 504 loan program.
WHAT IS IT? That’s the percentage of sales that the top performers in the 2004 Jewelers Financial Benchmarking Study spent on selling expenses. The top stores spent almost 14% on sales wages, advertising, store supplies, bankcard discounts, and bad debt to bring in every dollar of sales. Everybody else spent more, 17.3%, to bring in the cash.
STRATEGY: How do top performers get by with spending so much less? Well, it’s simply because the top folks tend to expect more from what they pay in this area. They don’t spend a dollar on any advertising without first having a goal in mind as to how many revenue dollars the new campaign should bring in for them. If you know how to run break-even analysis correctly, you’ll know what your return should be. Most people think of it as a dollar spent and a dollar brought in. In most cases, it’s a higher hurdle: closer to 1:3. Using break-even analysis, you’ll be able to see how much that new sales person you’ve hired will need to sell — to the penny! — in order to cover their salary, commission and benefits.
Money Math
Gross Margin Return on Inventory
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THE FORMULA: Divide gross margin dollars (net sales minus cost of goods sold) by average inventory dollars. GMROI shows a company’s return for every dollar invested in inventory.
HOW TO USE IT: If XYZ Jewelers had net sales of $500,000 last year and its cost of goods sold was $300,000, XYZ’s gross margin was $200,000 ($500,000 – $300,000). If XYZ’s average inventory level was $250,000, then GMROI?was 80 percent ($200,000 / $250,000 = .80.)
This story is from the July 2006 edition of INSTORE.
