To the editor:
A recent guest column in the Business Times concerning the U.S. Small Business Administration’s (SBA) 504 loan program requires both rebuttal and correction. SBA 504 loans are designed to provide small- and medium-sized businesses access to long-term capital for the purchase of owner-occupied commercial real estate and capital intensive equipment and machinery. This highly regarded loan program has been delivering capital to fund small business expansion since 1986 and over 130,000 small businesses have been able to finance well over $100 billion for their real estate, plants, stores and equipment.
The loan program is a creative combination of private and public financing designed to fuel economic development and job creation. Certified Development Companies (CDCs) provide 504 loans that are guaranteed by the SBA for up to 40 percent of a small business borrower’s project. A bank or other third party lender finances 50 percent for the project and the borrower typically pays a 10 percent down payment.
The recent guest column pointed out that default rates for the SBA 504 loan program were rising and that this was in some way related to CDCs making very risky loans to increase their commissions. The column implied that CDCs have no incentive to make loans that are credit worthy and will be repaid. This is absolutely untrue. In fact, 95 percent of CDC income is derived from the long-term servicing fees on the 504 loans. It is clearly in the interest of the CDC — as well as the small business and the taxpayer — to have a 504 loan that is in place for its full 20-year term.
Further, these loan projects are actually reviewed for credit quality by three independent parties: the CDC, the bank doing the first mortgage and, finally, the SBA’s loan processing center. It is highly doubtful that an unduly risky loan will pass through these checks. In fact, the loan default rates for portfolios of CDCs operating as Mr. O’Donnell’s CDC with “skin in the game” are no better than the rest of the CDC industry today, with each having suffered through this recession with extraordinary defaults.
Additionally, CDCs are non-profit, economic development organizations, not banks. No Certified Development Company would knowingly risk their standing as an SBA Certified Development Company and incur the extraordinarily high costs of foreclosure and liquidation for the processing fee maximum of only 1.5 percent. The time and money involved in handling a loan that goes into default is a large expense for a CDC and far outweighs any initial fee paid by a borrower. A recent ad hoc survey of the nation’s CDCs indicated that 37 percent of the small businesses who were in financial trouble over the last four years were kept afloat by extensive loan workout efforts between the small businesses, the CDC lender and the SBA — hardly the actions of greedy lenders focused only on upfront fees.
The 504 loan program has been an especially successful job-creation over the past 25 years. SBA 504 defaults have historically been below 4 percent, a percentage that would be the envy of any large commercial bank. Only during this recession have defaults increased to
9 percent, and then only for a few short quarters. Today, SBA data indicates that loan defaults have rapidly decreased to about 5 percent of the entire portfolio of over $20 billion in small business loans.
The real reason for increased defaults for all SBA loans, including those made under the 7(a) working capital program, is that consumers have cut back on spending for all types of goods and services. This decline in spending across the nation has affected businesses both large and small. To put it simply, many small businesses would still be in business today if not for the magnitude of this recession.
We agree that changes are needed for the 504 loan program, but they have more to do with the need to streamline some loan processing activities and ease restrictions that now make the application process a bit time consuming. Let’s focus on making the 504 loan program an even better program so we can assist more growing, job-creating small businesses own their buildings and add new employees to their payrolls.
The SBA 504 program is, by far, the largest and most successful federal economic development program in history. Amazingly, it is delivered by about 275 non-profit, community based lending organizations that focus on job creation, not lender commissions. The program and our CDC industry have the strong bipartisan support of both Congress and the White House. This industry will continue to provide incredible support for small businesses to help bring us out of this recession, in spite of what Mr. O’Donnell might believe about his competitor CDCs in Colorado.
Christopher L. Crawford
president and chief executive officer
of Development Companies
To the editor: