You’ll Never Know If You Don’t Apply: The ‘Life-Changing’ Potential of SBA 504 Loans

People often choose a wine by its label, which is why winemakers turn to companies like Vintage 99 to create attractive but technically challenging labels to help their brands stand out from the crowd.

When Vintage 99 needed financing to pay off an existing mortgage on its property in Livermore, California, and to raise cash for future operating expenses, it turned to the Small Business Administration’s 504 loan program.

Vintage 99 co-founder and President Kathleen Gonzales said the company was familiar with the program, having worked with TMC Financing in 2002 to obtain an SBA 504 loan to purchase a building when the company was only three years old.

“We needed the stability of being our own landlord and did not want to be bound to the needs of another property owner or landlord,” she said. “We have large equipment that we spec'd when we built the facility. Besides the cost, it's not easy to pack up and move our business, and we wanted to build equity.”

During the pandemic, the label maker once again turned to the SBA 504 program to refinance. In 2021, the company was being squeezed from both ends: Its client base was hit hard by the mandated closings of restaurants and tasting rooms, while prices on materials such as paper had increased more than 20%, Gonzales said. In addition, wildfires and extreme weather took a heavy toll on West Coast wine production. 

“With the uncertainty of Covid-19, government actions and bank lending guidelines, we needed to secure working capital by using our property for a cash-out refi,” she said. “Our business was down 30% and banks wanted to know when we would get back to 2019 levels. Unfortunately, my Covid crystal ball was on the blink.”

A conventional bank would normally require a client to have 25% or 30% equity in a building for a refinance. But with an SBA 504, a business owner can refinance up to 85% to 90% of the loan-to-value ratio and take cash out for working capital of up to 20% of the current appraised value, said Kurt Chambliss, the executive vice president of sales for TMC Financing.

TMC Financing is an SBA-regulated nonprofit known as a certified development company that promotes community economic development through 504 loans. Chambliss said the firm was the top SBA 504 lender in the nation by dollar amount in fiscal 2021, a year that saw unprecedented interest in 504 loans among small businesses.

A major incentive to apply, he said, is that these loans require only 10% down from the borrower.

“Most small-business owners’ perception is ‘Well, I don't have 30% to put down, so I can’t buy and I have to keep renting,’” Chambliss said. “But most small-business owners can afford a 10% down loan without having to put a lien on their house.”

Chambliss said the 504 spigot opened even more in 2021, after the government made it easier to qualify. In particular, an SBA 504 loan can now refinance certain government-backed loans, which was not allowed before the pandemic. SBA 7a, 504 and U.S. Department of Agriculture business loans that were mostly used to buy long-term fixed assets like buildings can now be refinanced with today’s low fixed rates, he said.

“It used to be really hard to refinance anything,” Chambliss said. “During the pandemic, one way the SBA made it easier was by allowing people to refinance government loans.”

SBA loaned $8.2B to businesses seeking second mortgages in 2021, which Chambliss said was a nearly 40% increase over 2020. Some borrowers took advantage of their new ability to refinance to convert to fixed-rate loans.

Chambliss expects 504 loan activity to continue to be brisk in 2022, but he noted that interest rates have begun inching up.

“I think there is still going to be continued demand for the product because more people know about it,” he said in mid-February. “On the flip side, rates are now 3.6% versus 2.9% a couple of months ago.” 

This has a direct impact on borrowers’ monthly payments, and Chambliss recommended that interested companies get pre-qualified before rates rise much higher.

“It's really important for them to talk to a good lender and see their options,” he said. “Maybe they won't find a building that works for them or maybe they won't ever get the loan, but it's free to apply. It takes a little bit of effort, but in a couple of days they can see what some of their options are. It could be life-changing for them.” 

Gonzales, whose company is a longtime TMC Financing client, agreed.

“While the process for the SBA can be involved, it's a more affordable option than a conventional bank loan and in some cases for us small businesses it is the only option, so it's well worth the effort,” she said. “TMC worked very hard for us.”

This article was produced in collaboration between Studio B and TMC Financing. Bisnow news staff was not involved in the production of this content.

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