The SBA 504 Program: Benefits for Business Explained

Imagine only having to put 10% down on a commercial building! REALTOR® Chris Herzog sits down with @WBD Inc. Vice President Mike Dieckman to talk about how the SBA's 504 program can help you buy a building or property for a low down payment and great terms.

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Chris: WBD formerly known as Wisconsin Business Development is a not-for-profit certified development company dedicated to helping businesses expand in Wisconsin through multiple unique programs offered by the U.S. Small Business Administration. Vice president Mike Dieckman is here today to explain how it helps businesses grow and hire more employees. Mike, thanks so much for being here today. (0.28)

So first of all, describe what is WBD. (0.32)

Mike: Well we're a we're private not-for-profit business, certified by the US Small Business Administration as you mentioned that are better known as SBA, basically to deliver one of the SBA’s program for them, specifically the SBA 504 program. We are one of about 220 active CDC’s throughout the nation. We are one of the more active ones. We will probably be involved in 175 and 200 projects in Wisconsin this year. (0.58)

Chris: That means about Millions and Millions of dollars into these programs I’m sure. First of all, what is the 504 program, how does that work? (1.07)

Mike: The phrase I always use is fixed rate financing for fixed-asset. So, when we do that we're always in partnership with a bank or credit union. So, we are not competing with those lenders, in fact, we can’t do anything without them. And how it works is the lead lender typically provides 50% financing in the first mortgage position, WBD using the SPA 504 comes in with up to 40% of the project, and the borrower is responsible for as little as 10%. So, it's really meant to be a win-win for the bank and the borrower. The bank comes in at a low loan-to-value position, so greatly reduces their risk and their exposure. (1:44) The benefits to the borrower are really two-fold, being able to come in at as little as 10% down is a big advantage because it allows them to preserve more of their cash for working capital and so forth. And on the 504 piece, the 40% financing piece in a long-term fixed-rate, we have a 10 year option, a 20 year option, a 25 year option and what's really neat especially recently is that short-term rates offered by the bank have jumped up from 3 and a quarter to 5 and a half percent just in the last two years. (2:14) Meanwhile the 504 rates, they got into the low 5s and now they settle back in below 5%. We are actually able to offer an interest rate that's well below the bank short-term rate so that’s pretty cool. (2:27)

Chris: What specifically can people fund through the 504 program? (2:31)

Mike: What I tell people is think of fixed assets, the land, buildings, and equipment so if I'm talking to a banker that we're going to partner with, a customer that's looking at buying a building, building a building, expanding their building, or purchasing equipment or combination of those, that’s really what you think of 504. You can also use it to refinance an existing mortgage. (2:52)

Chris: We work with obviously a lot of investors in the real estate space, can this program be used for real estate properties? (2:58)

Mike: It's really meant to focus on the small business, so if you are just going to be a landlord, it won’t work for you. But the SPA wants to focus on small business that are adding jobs, increasing the tax base through your business buildings and so on and so forth. The focus is really on the small business. (3:15)

Chris: So, how does someone get started, I'm sure it's probably a long process, how do they get this process going first of all?

Mike: I would tell you that probably 90% of the time we get brought into the picture by a bank, the bank has a situation they're trying to finance and they say, hey this would be a good fit for the 504 program, so that's usually how we come in we're trying through efforts like this to fly less under the radar.  They can call us if they do that directly and they aren't currently working with a lender. We would be happy to give them three or four names, we won't give him one name because we want them to pick their bank and then we'll work with the bank of their choice. (3:52)

Chris: From the time you get started and say okay this is a program I want to be in until the time that everything gets funded, typically how much time are you looking at? (3:59)

Mike: It is usually about 4 to 6 weeks is a good guesstimate, if we have to wait on an appraisal. (4:05)

Chris: How does it make you feel, I mean you probably work with a lot of different businesses, how does it make you feel to be intimately involved in this process where they have probably have a dream or something they want to do the for their business, to be an integral part of that program (4:17)

 Mike: Yeah, it's pretty neat because not only are we able to work with a variety of types of businesses and we can work with manufacturers, wholesalers, retailers, service providers, even dynamic marketing companies like Stokes|Herzog. We are also usually involved at a pretty exciting time in the lifespan of their business whether it's we’re helping them get started, or they're buying their first building, or building their first building so we can kind of share in the excitement with them. (4:45)

Chris: You get to see the financials for a lot of different companies, a lot of different types of businesses. What do you see typically as the Hallmarks of a successful business? Is it cash flow, is it the forecasting, is it just having a good idea, what do you see is the biggest thing that makes a business successful? (5:03)

Mike: I think the first thing because owning and operating a small business as you would know, is very challenging so the first and foremost, the easy answer is they have to be passionate about what you do, that's an easy answer there. Hard-working, dedicated, I think one of the most important traits is that you really have to recognize what your weaknesses are, and then surround yourself with people who can offset those weaknesses. And also, maybe the ability to adapt. If you think you're always going to operate your small business a certain way and things aren't going to change you’re probably going to have some challenges. So, I think the folks that can adapt to changes in the market, changes in competition, being able to adapt readily is pretty important too. (5:44)

Chris: If you look at the money of the financial aspects of running a business when you talk to people, what is the biggest challenge? Is it the day to day cash flow, is trying to see how they're going to grow in 5 or 10 years and trying to anticipate that? (5:56)

Mike:  You know right now the common theme that we're hearing right now is dealing with human resources, being low unemployment and so forth and there are companies out there right now. They're trying to grow, but they simply can't find the right people and keep enough people so right now that's a real common theme that the dealing with just the people aspect, is a challenge. (6:17)

Chris: Okay so for business owners, CEOs, COOs, they hear about this 504 program and they want to get involved in it, where do they go to find more information on how this whole process works? (6:26)

Mike: They can certainly contact us directly, WBD.org, on the website they can talk to their current Banker, say the lender that they work with, all of the banks and credit unions in our market know of us the public does not, but either route is fine. (6:43)

Chris: Vice President Mike Dieckman with WBD Incorporated, thanks so much for being here and offering some great information for business owners, CEOs and COOs.