“When I became aware of the SBA program, I realized it made much more sense for us. It gave us better terms, longer amortization and a lower interest rate, freeing up more of our own cash for inventory and operations.”
-- Ron Joyce (right), president 
of Joyce Foods in Winston-Salem

Getting 
Connected
to Capital

Many small businesses find 
the SBA's 504 loan program offers 
better terms, a longer payback 
and less paperwork

By Lawrence Bivens


Ron Joyce marketed chickens and he found himself in a pickle.

It was 1991 and the president of Joyce Foods in Winston-Salem needed capital to grow his business. Joyce was prepared to approach a conventional private lender to finance the entire $2.3 million expansion of his company, a maker of high-end poultry items for restaurants and gourmet grocery chains. Then he learned of the U.S. Small Business Administration's 504 loan program, at the time less than a decade old.

“When I became aware of the SBA program, I realized it made much more sense for us,” says Joyce. “It gave us better terms, longer amortization and a lower interest rate, freeing up more of our own cash for inventory and operations.”

Joyce Foods employed a workforce of around 70 when the loan was approved. Three years later, with more than 35,000 square feet of new space on a 6.5-acre site, the headcount had tripled to 210 workers.

Today, the firm markets its prepared poultry dishes across the Southeast under the Ashley Farms and Tanglewood Farms brand names. Many of its products wind up in front of diners at posh restaurants in Charleston, Atlanta, Savannah and Nashville. The legendary Brennan family in New Orleans relies on Joyce Foods for entrees on several of its menus. And, with Joyce's eyes now looking toward the lucrative markets of the Northeast, he says it's not at all unlikely that he will return to the SBA 504 program to finance another round of expansion.

“I believe commercial banks really appreciate the SBA program,” Joyce says. “It enables them to hold the first mortgage on projects that they're only providing half the financing for. That's a great deal for them.”

Loans for Hard Assets

Indeed, the SBA's 504 loan program seems to be a great deal for everyone. Most importantly, it addresses the greatest fear for entrepreneurs who are looking to manage a successful small business, yet are unsure of how best to finance anticipated growth.

The program provides businesses with long-term loans for major “hard” assets such as land, buildings and equipment. Interest rates are fixed for the loan period — usually 10 or 20 years — and are below the prime lending rates of most banks. The typical 504 project includes a loan from a private lender covering half the project's cost. The SBA-backed loan, secured with a junior lien, covers up to 40 percent, with the business itself contributing a down payment of at least 10 percent.

As of 1998, the most recent year that such data is available, more than 82 percent of North Carolina's private-sector workforce was employed by firms with fewer than 500 workers, according to the state Employment Security Commission (ESC). Here, as elsewhere, small business accounts for the lion's share of job growth, and programs designed to support emerging companies also serve a vital economic development objective.

“What's great about the 504 program is that it allows small businesses to borrow like they were big businesses,” explains Charles Malone, director of economic development at the Northwest Piedmont Development Corp. in Winston-Salem.

Malone's organization is one of 10 Certified Development Corporations (CDCs) in North Carolina, agencies licensed by the SBA to market, facilitate and service 504 loans. He points with pride to the impact the program has had on small firms across his five-county region. In all, about $18 million has flowed through the program to fund some 67 projects, Malone says. Included have been projects in warehousing, distribution, manufacturing and retail. Restaurants, day care facilities, auto repair shops and funeral homes also have benefited by the funds. And other homegrown businesses have watched their operations burgeon with the assistance of 504 financing.

See contact information for all 10 CDCs in North Carolina

Thus the Joyce Foods story is not unique. In fiscal 1999-2000, there were 106 loans written across North Carolina under the 504 program worth $41 million.

Eligible businesses include for-profit entities falling within standards set by the SBA. Those applying must not have a tangible net worth exceeding $6 million or average after-tax profits of more than $2 million during the previous two years. Nor can 504 loans be made to businesses engaged in speculation or investment in rental properties.

In most cases, 504 loans come with a dollar cap of $1 million. Loans of up to $1.3 million can be made for projects deemed beneficial to certain public policy goals — community revitalization, for example, export outreach, rural development or when the company is minority-, woman- or veteran-owned. The money can be applied to acquire or improve land, construct or renovate buildings and purchase durable machinery and equipment. Funds can also go to paying a project's “soft” costs like title searches, legal fees, appraisals, environmental surveys and permitting. Not allowed is the use of 504 funds for working capital or inventory, consolidating or repaying debt or refinancing.

“One of the major benefits of the program is that businesses can fold those soft costs into the overall project budget,” explains Malone. “That is not usually a feature of most commercial lending programs.”

504 loans are financed through the issuance of debentures, a SBA-backed debt security, and interest rates are set by credit-market forces. The March 20-year rate of 6.43 percent, for example, was about a point and a half above that of a comparable U.S. Treasury bond.

In making application for 504 loans to the local CDC, small-business owners typically submit the same materials required by their private lender. These include financial statements and tax returns for the past three years, financial projections, personal financial statements, a written history of the business, an explanation of expansion plans and other documentation. The CDC staff evaluates applications, obtains credit reports, visits existing and proposed operations and assesses credit worthiness. Upon approval by its board of directors, the CDC forwards applications to the SBA for acceptance. CDCs also provide service throughout the life of a loan.

In return for this valuable resource, firms are expected to create or retain one job for every $35,000 in SBA funding. In the Greater Wilmington area, that has translated into nearly 800 jobs over the past decade and a half. Some $66.5 million in total project value has been generated in part by an active 504 program there. But local leaders say the hidden benefit to the community is even greater still.

“The 504 program supports our local economy in two ways,” says Scott Satterfield, CEO of Wilmington Industrial Development, which serves as the CDC for Brunswick, New Hanover and Pender counties in addition to its role in facilitating industrial recruitment in the region. “The first, and most obvious, is in the direct creation of jobs and investment by the small businesses themselves. The second is less direct — that is, in helping build a vibrant entrepreneurial environment. Greater Wilmington is more attractive to the larger industries that may be considering relocation.”

Based upon his experience marketing the community as a potential outpost to large corporations from around the world, Satterfield says today's industry leaders carefully consider the overall business climate surrounding a potential location.

“Executives look for signs of a prosperous small business sector,” says Satterfield, who can rattle off a list of local 504 loan recipients who have gone on to build business relationships with major industrial names in the region. “They want to know they'll have access to the right vendors, suppliers and potential business partners, in addition to being able to purchase whatever they need at the consumer level.”

As with each of the nation's approximately 300 CDCs, Wilmington Industrial Development receives an origination fee from its processing of 504 loans. When taken together, the fees comprise a significant revenue stream for the development, which aggressively promotes the program to entrepreneurs throughout the three-county area.

“The 504 program has the added benefit of taking financial pressure off our local governments in the conduct of economic development here,” Satterfield says. “The fees Wilmington Industrial Development earns as a result of our role in the SBA program constitute our second greatest source of revenue behind membership dues — about 20 percent of our annual budget.”

User-Friendly Loans

Like its counterpart in Winston-Salem, Wilmington Industrial Development's handling of 504 loans has made a difference to an eclectic assortment of local businesses. One, the Golden Sands Motel in Carolina Beach (above), was able to leverage $750,000 in SBA funds to complete a $2.7 million expansion project in 1997. The effort more than doubled the hotel's number of rooms.

“I don't think I would have been able to manage the project without the help of the 504 program,” says Jimmy Pope, co-owner of the hotel, now one of the spiffier properties in the resort town. In Pope's case, his primary lending institution refused to finance the project without SBA involvement.

Although he says the 504 program is largely a user-friendly one, Pope sought the assistance of an accountant in organizing the data required for the application materials. “The forms were, at times, somewhat complicated, and we wanted to make sure we had all our t's crossed and i's dotted.”

504 funds also have been critical to firms recovering from setbacks unrelated to business. When Porta-Nails Inc. suffered a serious fire in November 1994, the maker of wood-flooring installation systems and other high-quality woodworking tools was faced with the challenge of replacing the antiquated manufacturing gear it had lost with the latest, state-of-the-art systems.

“The fire nearly put us out of business,” says Jerry Coleman Sr., founder and CEO of the firm, which maintains operations in Wilmington and in adjacent Pender County. “We were insured, but our insurance only covered the cost of the old equipment.”

With the help of a $230,000 SBA loan, the company was able to re-open the following May. “We returned to full operation and essentially shipped all backlog associated with the down time,” says Coleman, who says the unfortunate episode stirred no significant loss in his customer base.

Since then, Porta-Nails has returned to the 504 program for additional support in financing its growth. A $140,000 SBA loan in 1998 helped fund the purchase of additional equipment needed to launch a new product line. The firm, whose workforce has increased from 13 in 1994 to 48 today, currently markets its products nationwide, as well as in Europe, Canada, South Africa and the Pacific Basin. “Our ability to access the funding we need to keep current with the latest manufacturing technologies has been key to our growth,” Coleman says.

In the case of W.R. Rayson Co. Inc. in Burgaw, the spell of nasty storms hitting the region in recent years has meant seeking assistance from Wilmington Industrial Development and the 504 program. SBA funds helped the company, which makes specialized paper materials for the beauty, pharmaceutical, medical and other industries, with the purchase of land and the construction of its 55,000 square-foot headquarters when it relocated to Pender County from Long Island, N.Y., in 1992. But it was in the difficult and dangerous days following Hurricane Floyd in 1999 that the firm, which employs 50, had to return to the 504 program to replace equipment lost in the flooding.

Most people perceive the government as a barrier to doing business,” says Rayson's CEO Mike DiMartino, “but the SBA program is one that really reaches out and tries to help.”

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