Anyone who lived through the days of 22% short-term-loan interest rates understands the appeal of long-term, fixed-rate debt. Trouble is, it's hard to come by, especially if you're a small company. So you might be interested to know about a relatively obscure federal program designed to meet that need -- one that, oddly enough, seems to be underutilized.
It's called the Certified Development Company Program, or, simply, the Section 503 program. Its purpose: to provide small businesses with capital for "plant acquisition, construction, conversion, [or] expansion." To qualify, a company must be a for-profit business with a net worth of $6 million or less and an average net profit, after taxes, of less than $2 million during the previous two years.
In most cases, the business owners put up equity equal to 10% of the package. The bank supplies 50% with a first mortgage at market rates. The remaining 40% -- up to $500,000 -- comes from the sale of SBA-guaranteed debentures at the current Treasury rate plus administrative fees. The proceeds are then reloaned to the company in exchange for a fixed-rate second mortgage extending up to 25 years. With current interest rates, you could finance that portion of the deal for less than 9%.
Why, then, aren't more companies seeking these funds? One reason: it often takes as much as a month longer to close a 503 deal as it would to secure another type of SBA-guaranteed loan. So, for a $500,000 deal, the fixed-rate feature may not be worth the time and effort. Once you get up around $1 million, however, it probably is.