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Can the SBA 504 Loan make a difference in our Economic Crisis?
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The U.S. government’s fiscal year ended at midnight, September 30th. That often maligned agency for small business owners and entrepreneurs, the U.S. Small Business Administration (SBA), just released fairly sad numbers for last year: their flagship 7(a) program was down 30.3% versus the previous year with only $12,671,136,000 in funded volume for 69,434 loans. The SBA’s other major program, the 504, which often lives in the shadows of the 7(a) and isn’t nearly as widely known or promoted, was also down. The 504 numbers came in at $5,289,790,000 in funded volume for 8,883 loans — a decline of just 16.7% over FY ‘07.

What the differences in declines between each program suggest is something deeper and more profound for anyone interested in the success of America’s small businesses and entrepreneurs.

For starters, when the SBA’s own media people report and confirm their numbers, they’re often more interested in reporting the total number of loans, rather than the total dollar volume of their guaranteed loans. This inane reporting is their attempt at demonstrating the total number of small businesses their agency is helping. It’s the figurative equivalent of saying, “We’ve given $1 to each of America’s 27.2 million small businesses,” rather than reporting the dollar amounts guaranteed to those who’ll hopefully put the funds to best use. Their emphasis is on quantity in this way, rather than quality, and only in the artificial world of a government bureaucracy would that carry more weight.

Unfortunately, they are under-reporting the impact of their Agency’s guaranteed loans on our economy. When they don’t report true dollar volumes, it hurts their very cause and credibility. Their “mis-reporting” also continues to keep the 7(a) as the central loan program of the agency, thereby keeping the 504 in an unfortunate number two slot.

Due to the structure of how 504 loans are provided (with 50% of total project cost first mortgages, 40% of total project cost government-guaranteed second mortgage bonds, and the difference as borrower equity), the Agency is showing only half of the SBA 504 loans’ economic impact. For the Agency only mentions their 40% bond piece, rather than the combined loan amounts (first and second mortgages). Looking at it in this proper, “real-world” way, the 504 had an economic impact last fiscal year of providing approximately $11,902,027,000 in loans for small businesses and entrepreneurs to purchase/construct commercial real estate and/or equipment. This is only 6.07% less than the 7(a) program, the closest it’s ever been between the two primary loan programs.

The Agency completely missed out on reporting the other, estimated $6,612,237,000 that 504 loans also contributed to our economy. They totally forgot to report on the first mortgages, and as any lender who’s ever provided a 504 loan would tell you, “It’s kind of hard to provide the second mortgages without providing the first as well.” The two clearly go hand-in-hand. So it’s more than just some quaint oversight on the part of the SBA and the media who blindly reported their figures (the same media who think the SBA automatically and only equals 7(a) loans, completely forgetting to accurately report on the SBA’s other programs). It’s actually detrimental to the Agency and to their ability to promote this superior commercial loan program (the 504) and continue making their case for relevance as an Agency.

Using my more accurate numbers, this means the 504 dollars went to only 8,883 firms versus the 7(a) dollars going to 69,434 firms last year. That may seem “unfair” to some, but any knowledgeable commercial banker will tell you that 504 borrowers are further along the business maturity scale. They tend to be more stable, consistently growing firms, whereas we sometimes “roll the dice” (and taxpayer dollars) with 7(a) funds on less “proven” borrowers. This is clearly evident in the default rates between the two programs: 7(a)’s historically average about 3 times the total percentage of defaulted loans versus 504’s. I would argue that providing more promotion about and use of 504 loans would be a way to utilize our taxpayer’s money more wisely: you’d put more funds to work in the companies most likely to succeed, rather than the riskiest ones most likely to fail. This is simple common sense and good fiscal stewardship of taxpayer dollars.

More telling, the 504 loan program has been growing dramatically as a percentage of total SBA guaranteed loans in recent years, while the 7(a) has been diminishing. There are many reasons for this, among them are: 504’s offer below-market, fixed-rate financing for commercial real estate and equipment, while 7(a)’s historically do not; 7(a)’s require “full collateralization,” often meaning liens on homes, inventory, and receivables, while 504’s only secure the assets being financed; larger, credit-card-driven banks are no longer utilizing SBA guarantees on their small business credit card lines, which artificially inflated the 7(a) numbers for several years; and fees on 504 loans continue to decrease, while fees have risen on 7(a)’s. These reasons, combined with aggressive marketing of the program by specialist firms such as ours, help explain why the 504 loan program has grown over 100% in just five years. And yes, these particular loans are still plentifully available even in today’s credit freeze.

It continues to be a travesty that the 504 is restricted only to heavy asset purchases like commercial property and equipment, while the 7(a) can be used for those proceeds, as well as for working capital, business acquisitions, and refinancing business debt. I have been a strong advocate for many years of at least allowing America’s entrepreneurs and owners of small businesses to utilize 504’s to refinance their business debts. Enabling them to have access to what is consistently the least expensive financing available in the commercial marketplace, would trigger a substantial economic stimulus exactly where we need it most: for the innovative small businesses that constitute 78.9% of the job creation in this country and over 50% of the private sector employment . . . for the people that will lead us out of our economic downturn. We need existing government programs to work optimally before we create brand new ones. The politicians in Washington need to look no further than the SBA and its 504 loan program for options to jump-start our economy . . . I think it’s time they start, for their sake and ours.


  1. Clorse Dale says:

    That was a great article. Is there a decline in the number of loan requests? Or have the banks and SBA made the process too difficult? Keep up the good work with MCC. I’ve followed your progress for the years since you got started. Hope to bring a project in the near future.
    Clorse Dale

  2. Dwight says:

    Chris –

    Excellent article!


  3. Judd Basse says:

    Chris–Great article….Keep the pressure on
    Washington. The entire country needs the 504
    and all other programs that can/will help small
    business people….Thank you…

  4. Mitch says:

    Chris for President! As always, a well written article. Keep up the good work, MCC!

  5. Christopher Antony says:

    Certainly most, if not all, of the mainline sites [MS Money/Mottley Fool/Mad Money/DJ] could use your eye-opening data. Too often we all gloss over the details

  6. Robert Seagreaves says:


    Thanks For another great article.Whatever we can do to help your efforts to make it happen let your readers know , you have my support.


  7. Nazir Molu says:

    Based on the feedback from Bank, the SBA has frozen all new loans? Is this true?
    Thanks for a great article…

  8. Jeff Rauth says:

    Your point regarding why the SBA 504 cant be used for refinance is huge . And that the 7a floats is often the worst thing for the borrower. How they came up with a qtrly adjustable program is beyond me. Its supposed to be a safe, goverment sponsored program…

    It reminds me of the goverment program that was created to elimate spamming on the internet – no bs the acronym for it is called CANSPAM

  9. Marin says:

    Article is informative. Thank you for the valuable information.

  10. Rob K says:

    CDC’ are the ones destroying SBA 504 loans
    During this hard times, they only care about getting their monthly fees paid. Helping small business is not their mission. Their agenda is opposite: prevent by any means existing borrowers from getting any relief available by SBA today

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