The jump has been dramatic: In the first nine months of this fiscal year, the U.S. Small Business Administration has seen a 50-percent increase in 504 loans, which provide long-term financing for major assets such as land, equipment and facilities.
As of July 31, a total of $45.9 million in 504 loans had been approved in Rhode Island, the SBA’s Providence office said. Not only is the dollar value up sharply, but more companies are benefiting – 69 since Oct. 1.
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But what is driving this growth?
Some say it’s the result of increased marketing. Some say it’s the result of an increased cost of doing business, pushing companies to look for better deals. Higher commercial interest rates may also be a factor. Whatever the reason, the SBA is estimating that these loans will help create about 600 jobs in the state.
Precision Craft Dental Laboratory Inc. of North Providence intends to add about 14 positions when it moves to a bigger facility in Smithfield this fall, said Ryan Napolitano, general manager of the company, which manufactures crowns, bridges and dentures.
Precision Craft received a $706,000 SBA 504 loan to purchase and renovate a 14,000-square-foot facility. Napolitano said the company went with the SBA loan because the initial cost was lower than for a similar commercial loan.
The 504 loans require small businesses to contribute at least 10 percent equity, whereas typical bank loans require 25 to 30 percent, said Marilyn Bogue, an SBA lender relations specialist.
“In the last year, when you see the rising prices of real estate, it might be difficult for a small business to come up with that cash,” said Joseph Hinkle, senior vice president of small business lending at Bank Rhode Island, which so far this year has made six 504 loans worth $2.7 million.
Community development companies – nonprofits set up to foster economic development – have been promoting the 504 program in the state. They account for $19.2 million of the loans so far this year.
Carol Brennan, director of business development for the New England Development Corporation, one of six SBA-certified CDCs authorized to do business in Rhode Island, said the companies act as agents for the SBA in the loan process, and also service the loans.
Until two years ago, the Ocean State Business Development Authority was the only CDC certified by the SBA in Rhode Island. “Now, competition exists,” Brennan said.
Henry “Bud” Violet, president of Ocean State, said he doesn’t think increased competition is behind the rise in 504 loans. “We always tend to get busier when interest rates increase,” he said, adding that Ocean State still does the most 504 loans in Rhode Island – 21 so far this year.
Interest rates for 504 loans are about 7.3 percent this month, Brennan said.
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Don Lachapelle, controller at Contech Medical Inc. in Providence, a medical device maker that this year received a $751,000 loan to purchase the 114,000-square-foot Hartford Avenue building where it had been operating, said the fixed 20-year rate was a factor in his choice. But the main draw was the lower down payment.
“That alone is a big incentive,” he said. “In our case, we had good cash flow to fund the mortgage. It was just the initial down payment.”
Both Trinity Mortgage Solutions, in Providence, and the Narragansett Pellet Co., in East Providence, said they had used the 504 loan program this year because, as startup companies, they couldn’t find a bank to finance them.
The loans helped pay for equipment for the pellet company and an office for the mortgage company. “Having the SBA [guarantee] helped make the decision for the bank easier,” said Bill Carden, president of Narragansett Pellet. The company incorporated in January and will start manufacturing pellets used for heating homes on Aug. 28.
SBA 504 loans can be as high as $10 million but average about $1 million, Bouge said.
“It makes financing more available to more people,” Hinkle said. “And it lowers our risk.”
