Looking Ahead

There is no question small businesses will be paying more for 504 loans, which typically run 20 years and are used for purchasing land and building structures. Loans from the 504 program are generally limited to $750,000. The small business must put up 10 percent to 15 percent of the total project amount, either in cash, collateral or a combination; under the Meyers bill, companies less than 2 years old must put up an additional 5 percent.

"The advantage of this program is that [without it], small businesses cannot get 20-year construction loans from banks, much less for 10 percent down," says Chris Crawford, executive director of the National Association of Development Companies. "Even when you add in the new fees, these loans are an attractive alternative for small businesses."

The new 504 fees keep the program's subsidy rate at zero. The legislation increases the guarantee fee paid by 504 borrowers from one-eighth of 1 percent of the principal to seven-eighths of 1 percent. For a $1 million loan, that means instead of paying $1,125 on the $900,000 principal, the business pays $7,875.

In addition, there is a new one-half of 1 percent onetime fee that will come from one of three sources: the first mortgage lender (the bank), the borrower, or the certified development companies (CDCs) that put up some of the loan. Who pays that new fee will be determined via negotiation between the three parties. "It will depend on how bad the borrower wants the deal," says Crawford. This new fee is in addition to the service fee the borrower already pays the CDC. It was raised by one-eighth of 1 percent and has been capped between 1 percent and 1.5 percent, depending on where the borrower is located.

This article was originally published in the January 1997 print edition of Entrepreneur with the headline: Looking Ahead.