Wizard of Oz: [speaking with a booming voice into a microphone] I AM THE GREAT AND POWERFUL... [then, he realizes that the curtain has been ripped open, his secret is out and it is useless to continue the masquerade. The wizard moves away from microphone allowing his shoulders to sink and speaks in a normal voice]. ... Wizard of Oz.
Sometimes commercial lending and borrowing, especially when using an SBA program, can seem like a hocus pocus magic trick. It can be complicated when the curtain is closed, but we strive to make sure we are more “Oscar Zoroaster Phadrig Isaac Norman Henkel Emmannuel Ambroise Diggs,” (the wizard’s actual name…notice that the first letters of his first two names spell OZ. The first letters of the remaining names spell P-I-N-H-E-A-D… kind of funny, actually) than the mysterious Wizard. Let’s hope this blog pulls the curtain back and gives a peak into the process of 504 lending.
In a perfect environment, it takes approximately 70 days to fund a project from the time the application is approved by SBA. It is important to remember that the 504 loan does not fund a project until all construction has been completed. This, however, does not mean that projects have to wait 70 days to get started. The bank partner provides the interim financing once the 504 application has been approved by SBA. Interim financing can be thought of as short-term financing issued in anticipation of longer-term financing. It acts as the financial “bridge” from project start to project completion. The banking partner and the borrower are alerted that the loan has been approved (everyone celebrates and toasts each other). The bank puts the interim loan in place and the project starts (this may be the part where toasting each other dries up and the “Oh no, what have I done” feelings start. Don’t worry; those feelings go away pretty quickly).
The project has gone well and no major cost overruns or construction hiccups have taken place (this is Oz, I can put as much outlandish stuff in my stories as I want). The next step is the closing. A pile of documents need to be signed including the note, the servicing agent agreement and guarantees. The loan package is then shipped off to the attorneys (yours, Enterprises’ and SBA’s). This seems odd, right? We have already gone through the closing, but it is just now getting sent to the attorney? Remember, this is Oz. There are still a lot of holes to fill in, including the interest rate, the pool date and the bond sale. This is where the 504 process diverges from conventional financing and follows the “yellow brick road” that leads to the bond market. After the attorneys “perfect” the package, ensuring that all of the necessary information is included, the loan is forwarded to the underwriters to be pooled with other 504 loans and sold as debentures. A debenture can be thought of as a promissory note secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. 504 loans from all over the country are “pooled” together and sold on the bond market with a full government guaranty. This is why it is so important for SBA and their 504 partners to do as much due diligence as possible. These bonds are sold based on the SBA’s ability to ensure that the borrower has a solid business and will more than likely pay on time and in full.
We are closing in on the end of our journey. The final two steps are the pricing date and the funding date. The pricing date is a fixed date, which is always the Thursday of the first full week in the month. This is the date when the fixed interest rate for your 504 loan is set. The funding date is the first Wednesday after the pricing date. The funding date is exactly what it sounds like. The funds are wired to the participating lender and the bank is reimbursed for the 504 lender’s portion of the loan (up to 40%). The fixed interest rates are set, the final loan structure is in place and our journey is complete and we become friends for the next 10 to 20 years.
Sometimes commercial lending and borrowing, especially when using an SBA program, can seem like a hocus pocus magic trick. It can be complicated when the curtain is closed, but we strive to make sure we are more “Oscar Zoroaster Phadrig Isaac Norman Henkel Emmannuel Ambroise Diggs,” (the wizard’s actual name…notice that the first letters of his first two names spell OZ. The first letters of the remaining names spell P-I-N-H-E-A-D… kind of funny, actually) than the mysterious Wizard. Let’s hope this blog pulls the curtain back and gives a peak into the process of 504 lending.
In a perfect environment, it takes approximately 70 days to fund a project from the time the application is approved by SBA. It is important to remember that the 504 loan does not fund a project until all construction has been completed. This, however, does not mean that projects have to wait 70 days to get started. The bank partner provides the interim financing once the 504 application has been approved by SBA. Interim financing can be thought of as short-term financing issued in anticipation of longer-term financing. It acts as the financial “bridge” from project start to project completion. The banking partner and the borrower are alerted that the loan has been approved (everyone celebrates and toasts each other). The bank puts the interim loan in place and the project starts (this may be the part where toasting each other dries up and the “Oh no, what have I done” feelings start. Don’t worry; those feelings go away pretty quickly).
The project has gone well and no major cost overruns or construction hiccups have taken place (this is Oz, I can put as much outlandish stuff in my stories as I want). The next step is the closing. A pile of documents need to be signed including the note, the servicing agent agreement and guarantees. The loan package is then shipped off to the attorneys (yours, Enterprises’ and SBA’s). This seems odd, right? We have already gone through the closing, but it is just now getting sent to the attorney? Remember, this is Oz. There are still a lot of holes to fill in, including the interest rate, the pool date and the bond sale. This is where the 504 process diverges from conventional financing and follows the “yellow brick road” that leads to the bond market. After the attorneys “perfect” the package, ensuring that all of the necessary information is included, the loan is forwarded to the underwriters to be pooled with other 504 loans and sold as debentures. A debenture can be thought of as a promissory note secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. 504 loans from all over the country are “pooled” together and sold on the bond market with a full government guaranty. This is why it is so important for SBA and their 504 partners to do as much due diligence as possible. These bonds are sold based on the SBA’s ability to ensure that the borrower has a solid business and will more than likely pay on time and in full.
We are closing in on the end of our journey. The final two steps are the pricing date and the funding date. The pricing date is a fixed date, which is always the Thursday of the first full week in the month. This is the date when the fixed interest rate for your 504 loan is set. The funding date is the first Wednesday after the pricing date. The funding date is exactly what it sounds like. The funds are wired to the participating lender and the bank is reimbursed for the 504 lender’s portion of the loan (up to 40%). The fixed interest rates are set, the final loan structure is in place and our journey is complete and we become friends for the next 10 to 20 years.
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