SBA 504 Loan Program Levels Playing Field for Small Hoteliers
By Christopher G. Hurn President & CEO, Mercantile Commercial Capital LLC | October 28, 2008
In the hyper-competitive hotel business, keeping pace with the major flags and industry giants can be a daunting task for small hoteliers and franchise operators. Banks and other lenders take very close and careful assessments of the small hoteliers' track record and personal credit history when considering financing. Access to capital, which is essential for the small hotel owner/operator to maintain and enhance their property and amenities, is extremely difficult, and ultimately this prevents many of these smaller businesses and properties from reaching their fullest potential.
One of the best solutions for the small owner/operator is the Small Business Administration's 504 loan program, which enabled 753 hoteliers to borrow $802 million during the 2006 federal fiscal year. This total number of borrowers was significantly greater than any other type of business, and it amounted to approximately 14 percent of all of the 504 loans in the country.
These borrowers and hundreds of others in previous years took advantage of the very best possible option for financing for the acquisition or development of their properties. With an SBA 504 loan, first-time owners receive up to 85 percent loan-to-cost financing with the highest cash-on-cash return available in the marketplace. This leaves more of their hard-earned capital to redeploy elsewhere at a higher ROI.
Nearly half of the total loan amount with a 504 loan is the least expensive financing available in the commercial mortgage industry for small and mid-size businesses (averaging about 150 basis points less than market pricing for fixed 20-year terms).
In all 504 loans for hotels, a certified Community Development Corporation (CDC) provides up to 35 percent of the financing for a project under the SBA 504 loan program. A commercial lender provides up to 50 percent, yet they enjoy the low risk of a first-security position.
The borrower's capital contribution is at least 15 percent, and it goes up to 20 percent for companies with an operating history of less than 24 months. The additional equity requirement from the borrower reduces the amount of financing under the SBA portion, so for start-up hotels the financing would be 50 percent from the private sector, 30 percent from the SBA and 20 percent from the borrower.