504 Loan Blog: Curated by Mercantile Capital Corporation

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Inc. 500 – Pt. 2 (video blog)
  • Saturday, September 20th, 2008 at 1:54 am
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Here’s a clip from Day Two of the 2008 Inc. 500 Conference. You’ll get to see a little bit of the Gaylord National — the brand-spanking-new hotel where the conference was held — and I’ll tell you about some of the speakers we got to hear . . . some good, some not so good. I hope you enjoy, and stay tuned for more updates!

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Inc. 500 (video blog)
  • Friday, September 19th, 2008 at 2:12 pm

Here’s the first of several videos from the Inc. 500 Conference in Washington, D.C. It’s been a pretty good event so far. Most of the entrepreneurs here seem rather unfazed by everything going on in the financial markets, but I’ve met some folks who simply refuse to give up their dour mood. Hopefully things pick up a little more over the next several days.

I treated Trey to a nice dinner at Charlie Palmer’s Steakhouse near the Capitol, so that’s the hustle and bustle you see in the background. I hope you enjoy my comments, and be sure to check back for more video broadcasts!

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Changing of the Guard

With the Dow Jones Industrial Average (DJIA) dropping 504 points yesterday and me being the “504 Expert,” I thought it must be a sign to comment on that course of events. While Lehman’s bankruptcy, Merrill’s sale and AIG’s capital call are indeed worrisome, the sky isn’t falling for the American economy at-large. The financial markets may be reeling, but it’s always the worst when you’re smack in the middle of things . . . a little perspective is needed.

Lousy lending standards and excessive leverage stoked by ridiculously low interest rates are the roots of today’s financial crisis . . . but it’s largely confined to just the well-publicized, finance industry. The economy is not crumbling — it’s been growing at an average rate of 2.37% for the past 6 quarters. The non-housing portion of the economy (which comprises roughly 95% of total U.S. economic activity) is quite stable with the non-housing real GDP having grown at a 3.2% clip over the past three years. Productivity of the average U.S. worker has risen an average of 2.6% annually during the past 10 years (the largest gains in 40 years). For every dollar of U.S. economic output generated today, we burn less than half as much oil as 30 years ago — and the price of a barrel is now close to $95, almost $50 less than the high in July. Times are better than they appear… but it helps if you unplug the television and skip the “doom and gloom” headlines in every other media (this is also why you should have the courage to be buying currently discounted assets like commercial property right now). Obviously, this being an election year and politicians doing what politicians do best to get our attention, neither can sling quite enough mud at each other in their attempt to paint a picture of Armageddon in our minds . . . alleviated only if we vote for our “savior.”

As I’ve written previously, among the many roles a Chief Executive Officer has is that of “hope-purveyor,” of remaining calm, optimistic, and reasonable. Employees, business owners, and their advisors regularly look to me to gauge where things are headed. I always marvel a little at me being the “calm one,” but such is my place. I strive to be a “merchant of optimism.” So this blog post is as much for my employees and partners, as it is for our investors, Clients, prospective Clients, and the business community as a whole.

Today’s headlines suggest to me that we’re entering a New Era in our society — one where the venerable old names don’t really matter that much anymore. We’ve been headed in this direction for some time with the disruptive technologies the IT world has wrought everywhere. But now, the staid, conservative financial and banking communities are finally feeling the tremors (or should it be the “earthquakes”) of change. What Lehman, Merrill and AIG had in common was resting on their laurels too long, not adapting to change as quickly as they should have, and becoming victims of their own hubris. All of these actions left them distant from their customers… and if there’s one absolute fact in this New Era, it’s this: customers want to be closer to, not further away from, their service-providers. They want their service-providers to understand them. When you’re busy creating exotic financial instruments that hardly anyone really understands, just how exactly do you expect Clients to feel closer to you?

In this new world of constant communication, social-networking, and Web 2.0, people don’t just want “service-providers,” they want “Experience-providers.” They want their business relationships to be comprised of Experiences . . . service, alone, is not enough anymore. “Satisfaction” is merely expected. “Delightful experiences” are something to shoot for. I believe that’s what we’ve provided our Clients with from day one, and it’s a major contributor to our growth and successes. Contrary to what every pundit once said, the computer and other electronic gadgets have actually brought us closer together, not further apart . . . so if you’re hiding behind your email or voicemail, you’re making a MAJOR mistake by not engaging with your Clients and Prospective Clients. Of course, if you’re bloated with layer after layer of management and suffer “Big Dumb Company-itis” (as I call it), then getting close to your clients is pretty tough to do.

It strikes me as unreasonable to expect a Wall Street firm to still be around 160 years after its founding. It strikes me as odd to think the original DJIA should somehow match today’s DJIA. Change is the other member of the triumveriate of Constants: death and taxes being the other two, of course. Am I the only one who wasn’t exactly surprised by the “Old Guard” changing? I’m surprised it took this long.

What we witnessed yesterday — and it should be more apparent daily — is that Schumpeter’s “creative destructionism” is alive and well within our economy. The strongest survive, as they say, but to be strong these days requires being smart, swift and adaptive. Our firm is the personification of this trend — we probably couldn’t have started 15 or 20 years ago and actually thrived against the Giant banks in our industry . . . like we have. But today, being the cigarette boat instead of the supertanker is appreciated by the consumer . . . actually, it’s demanded by them. Old, established brands are doing everything they can to hold-off the oncoming wave of new entrants.

With us, it helps that the entrepreneurial spirit prevalent among our employees resonates with our target market of business owners and entrepreneurs… while we compete in a world filled with 20+ year employee veterans who have no comprehension of the risks, burdens and thrills our ideal Clients endure weekly. If you want your business to thrive in this New Era, then you’ve got to Stay Close to your Clients and Prospective, Ideal Clients. You’ve got to Give Them an Experience they can’t get anywhere else by anyone else. You’ve got to Delight Them, but also, you have to do the heavy-lifting of Creating the Next, New Thing. Anything less than these strategies and you’ll more than likely be working for a dinosaur. Surely, you remember what happened to them . . . they once roamed Wall Street, too.

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Are you an “arm-chair judge” like me?
  • Wednesday, August 13th, 2008 at 7:35 am

I have a confession to make: I haven’t watched much of this year’s Olympic Games at all. It’s not that I don’t want to — I’m HUGE fan of the Olympics. I love watching the world’s best athletes compete at the highest level of their sports.

I simply haven’t had time lately.

Contrary to what a lot of people believe, the mortgage industry isn’t entirely in the dumps. We’re actually having our best year ever . . . and because we’re so busy, I’ve been watching the least amount of Olympic coverage ever. I suppose it’s a good problem to have.

However, when I DO get a chance to sit and watch a few minutes of gymnastics, or diving, or even trampoline, I tend to add my own commentary to the program. In fact, as my wife would tell you, I might as well mute the audio altogether. If the athletes do something that impresses me, I make it known. And when one performs so terribly that they might as well have stayed home and saved their airfare, everyone within earshot hears about it.

I’m what I like to call an “arm-chair judge” . . . and I often do a MUCH better job than the actual Olympic judges. At least I think so.

I know there are others like me, too. We recently did direct-mail campaign to some potential Clients, and we included a set of scorecards so folks can flash real numbers to show what they think about a gymnast’s dismount or a synchronized springboard dive. We thought it’d be a novelty that someone might chuckle at and discard, but we’ve gotten a lot of comments about them . . . and requests for more.

Lately, scoring for a lot of events (gymnastics, for example) has gotten ridiculously complex. You would need a slide-rule and a calculus professor to figure out how it all works. It’s MUCH easier to throw up some numbers, add them up and take the average. Whole families have started using our scorecards and are keeping their own scores to see how they compare with the medal results for a particular competition.

Anyway, since they’ve been so popular thus far, I thought I’d make these handy-dandy scorecards available to everyone. All you have to do is go to http://www.504experts.com/Armchair_Scorecard_Web.pdf and download the PDF. I have to warn you, though: some assembly is required. After you print them out, cut on the dotted lines. Just be careful with those scissors. (You can also print them double-sided to cut down on the number of cards you have to keep up with.)

I hope you have fun with your scorecards . . . and I hope I actually get to watch some of the Olympics before it’s too late!

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Some recognition for the 504

As you may know by now, MCC has become “famous” for being the first commercial lender to always lead with the SBA 504 loan (AKA our SmartChoice Commercial Loan). Well, it seems that the “softening” in the economy and craziness in the mortgage industry has caused other lenders to give this little-known and under-used financing option a second look.

I spoke with Colleen Debaise, a reporter with SmartMoney magazine (which has a circulation of 824,327), a couple days ago about this very phenomenon, and they’ve posted an article on their website. For us, it’s a no-brainer: the 504 loan provides such great benefits for our Clients that we MUST lead with it every time a deal qualifies. Many other lenders (the big banks) are finding that these loans are less risky for them, and they like that now. After all, we ARE in the middle of a “credit crunch.”

Regardless of lenders’ motivations, I’m truly glad that the 504 is getting some good press. Hopefully lots of business owners will benefit. It’s just a little sad that it’s taken “softer” economic times for some in the mortgage industry to realize what a “shining star” the 504 is for the SBA . . and for the business owners who benefit from it.

You can read the full article here, or I’ve posted it below for your convenience.
(Here’s the web address, in case the link doesn’t appear for you: http://www.smsmallbiz.com/capital/Business_Owners_Flock_to_SBA_504_Mortgages.html?cid=23.)

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Businesses Find Cheap Capital in SBA Mortgages
July 30, 2008
By Colleen DeBaise

FOR YEARS, A LITTLE-KNOWN Small Business Administration lending program known as the 504 has stood in the shadows of the agency’s flagship loan program, the 7(a).

But now, as banks tighten their lending practices and commercial office space becomes cheaper in some markets, a growing number of business owners are turning to 504 loans. These loans can be used to purchase business real estate or fixed assets (such as heavy equipment or machinery). And, because 504s are backed by the government, they’re typically easier and cheaper to secure than conventional commercial mortgages.

Here’s how a 504 loan works. A small business decides to purchase, say, a commercial office building for $1 million, which includes renovation work plus “soft” costs such as permit and design fees. To finance the purchase through a 504, the borrower must put down at least 10%, while an SBA-certified nonprofit agency lends another 40% through a government-backed bond offering. Then, a commercial bank or other lender provides the remaining 50%. Typically, the money is loaned at below-market interest rates, for longer terms than most commercial mortgages (say, a 20-year term rather than a 15-year term), making it more affordable for the average small-business owner.

The 504 “is a product that has so many advantages that it sells itself,” says Roslyn Goldmacher, president of the nonprofit Greater New York Development Co., a Bethpage, N.Y., certified development company, or CDC, that specializes in 504 loans. “The biggest issue is awareness.” The 504 is more complex than most conventional loans and therefore isn’t well-marketed, she explains. And historically, many lenders have veered away from the 504 just to avoid all of the extra rules and steps (such as finding a partner CDC) involved.

But things are starting to change. “I would certainly say there’s a lot more players now then there were three years ago, [when] we were one of the only banks that were pursuing this aggressively,” says Laura Larson, SBA program manager with KeyBank in Cleveland. Now, with the economy unsteady, banks are more interested in making low-risk loans such as the 504, which is secured by the property and government bond, she says.

KeyBank recently worked with a number of small-business clients — including a boat-repair company, a printer and a heating/cooling company — that used 504 loans to buy buildings and equipment that they would have had to lease under other circumstances. Other big banks that provide 504 loans include Citibank (C), Bank of America (BAC) and Chase (JPM).

A number of private lenders are providing 504 loans, too. “Our business is having the best year we’ve ever had,” says Chris Hurn, founder of Mercantile Commercial Capital, an Altamonte Springs, Fla., mortgage lender that helps a broad range of clients — including hotels, restaurants, professional-services firms and even doggie day-care operators — secure 504 loans. “I’ve often said it’s the best-kept secret of the SBA.”

While the 504 program’s rules and restrictions might scare off some business owners, most businesses easily qualify, Hurn says. For example, because the 504 program is chiefly designed to encourage economic development, borrowers are expected to create or retain one job for every $50,000 provided by the SBA. A business that doesn’t meet that requirement, however, still might be able to qualify if it meets one of the program’s community development goals, say, if the business is owned by a woman, minority or veteran. For more on 504 program rules, click here.

And while a traditional commercial mortgage usually requires a business to put down a higher down payment (often, at least 20%) and pay soft costs out-of-pocket. The 504, on the other hand, provides for 90% financing of total costs. And thanks to lower rates and extended terms, “it’s the least expensive capital available to small to midsize business owners right now,” he says.

Another bonus: Unlike other SBA products, a business owner doesn’t have to prove they’ve been turned down by a bank in order to qualify for the 504, says KeyBank’s Larson. “Some savvy business owners who could be eligible for conventional financing might look at the 504 as a way to preserve cash,” she says.

Small-business owners interested in a 504 should contact their bank or private lender, or their local CDC (there are about 300 nationwide). Keep in mind, the most appropriate candidates aren’t start-ups, but rather businesses that are ready to buy commercial space because they “have weathered the cycles a bit,” Hurn says.

(end of article)