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2020 was a year of change, and it tested our resiliency as we adapted our business model to the “new normal.” The pandemic slowdown has taken a large toll on small and medium-sized businesses (SMB), which provide up to 50% – 67% of private-sector jobs in the United States, causing a big economic impact on local communities.
Over the past year, a variety of support has been offered by the government — from grants to tax relief to loan repayment deferrals — to assist small businesses during these challenging times. The US government has also demonstrated its confidence in the recovery of small businesses by continuing to issue loans through its 504 Loan Program.
Now more than ever, 504 loans are increasingly being utilized, but they are still a lesser-known financing product. 504 loans can provide capital to businesses when conventional lenders are becoming more cautious due to economic uncertainty, and are a tool that benefits both borrowers and lenders with low borrower interest rates coupled with low lender advance rates.
An SBA 504 loan is a loan guaranteed by the federal government’s Small Business Administration (SBA). These loans are comprised of a conventional loan from a private lender (first-lien financing) and a 100% guarantee on a loan in a second lien position from the SBA. SBA 504 loans are arranged through Certified Development Companies (CDCs), which are community-based, non-profit lenders that are overseen and certified by the SBA. Under the loan program, the CDC partners with a private lender; the private lender provides financing up to 50% of the value of the collateral asset, and the CDC arranges for financing up to an additional 40% of the value in a junior lien position. The SBA loan can be as large as $5 million, and it is a fully amortizing 25-year loan with a below-market, fixed interest rate.
The purpose of the SBA 504 program is to promote enterprise growth, stimulate job creation and allow small business owners to build equity by owning their buildings. The program was traditionally only used to finance the construction and acquisition of fixed assets (primarily real estate), but has recently opened up to allow for the refinancing of existing business debt and access to working capital for growth. For more information on program eligibility, visit the SBA website.
Using the SBA 504 program, business owners can take advantage of below-market, fixed-rate financing to refinance existing debt and provide working capital up to 90% of the value of their building. They can use an SBA 504 refinance loan to lower occupancy costs and access cash trapped as equity in commercial real estate holdings. The loan has an upper limit of $5 million, but over multiple projects can allow a business owner to borrow up to $15 million for environmentally-focused or green energy projects (at a maximum of $5 million per project).
AVANA Capital has a deep history and expertise in facilitating this type of loan assistance for small business owners. For nearly two decades, we have issued 504 loans to entrepreneurs, leading to the creation of over 10,000 jobs in communities nationwide. We have long supported SMBs in overcoming challenging economic times — from the last financial crisis to the recent pandemic recession. As a result of our extensive experience in SBA 504 loans, AVANA Capital is skilled at overcoming the challenging nature and complicated structure of transactions involving this financing option.
AVANA Capital has a deep history and expertise in facilitating this type of loan assistance for small business owners. For nearly two decades, we have issued 504 loans to entrepreneurs, leading to the creation of over 10,000 jobs in communities nationwide. We have long supported SMBs in overcoming challenging economic times — from the last financial crisis to the recent pandemic recession. As a result of our extensive experience in SBA 504 loans, AVANA Capital is skilled at overcoming the challenging nature and complicated structure of transactions involving this financing option.
AVANA Capital continuously strives to help entrepreneurs acquire the financing that they need to make their vision a reality. One example is that of Atul Patel and family, long-time hotel business owners in the Lompoc, California area. Their late patriarch, Atul Patel, Sr., had originally conceived the idea of building Lompoc’s first upscale hotel, but passed away in 2009 before it could be built. For years, the Patels had been aware that Lompoc visitors were choosing to stay at upscale hotels in neighboring towns 20-30 miles away, and could see the growing need for a larger, name-brand hotel in the town.
The family had purchased 2.76 acres of land for the hotel in 2008, but when the recession hit, the property fell into foreclosure and it was lost in 2010 before construction began. The lenders they sought out recognized the potential of the opportunity, but the family wanted to create the hotel the way their father had envisioned.
AVANA Capital was able to come through for the Patels with an SBA 504 loan structure that solved their financing challenges. As an SBA loan, AVANA was able to fund the project at 80% loan to value (whereas traditional lenders will only fund 65%-70% loan to value). The Patels also took advantage of the SBA 504 Green Energy program to power the hotel with renewable energy. The solar energy system creates a 10%-15% reduction in energy costs, which could amount to savings of as much as $60,000 a year.
The family found that AVANA was different than other lenders in that the team understood this project was part of a family legacy and was much more than a business to them. The project, a four-star property and the area’s first new hotel in over 20 years, also supported and aligned with AVANA’s mission to create jobs and stimulate local economies. Through this project, 100-125 new employees were hired and the hotel is expected to pay $600,000-$700,000 per year in bed taxes to the local municipality. Further, their local Tourism Tax will generate another $120,000, which will then be used to promote the city.
AVANA Capital also found solutions for a business owner through 504 loans in the case of Kevin Darroch, owner of California-based MachineTek and a disabled veteran of the U.S. Air Force. MachineTek, a 20-year-old business that provides products and services to companies like SpaceX, Lockheed, Northrop Grumman and Bell Helicopter, was presented with the opportunity to buy the manufacturing facility it had been leasing since 2008. However, MachineTek was not able to finance the purchase because of modest profits due to the recession at the time. Many lenders declined the deal, despite the SBA/CDC support that was cultivated. After reaching out to AVANA Capital, the team came up with solutions to help finance the commercial real estate necessary to grow MachineTek and accomplish Kevin’s goals.
The SBA has a specific program dedicated to Disabled Veteran Small Business Owners with loans to support their businesses. AVANA realized it was a good opportunity to put this program to use. The closing of the deal also came to fruition due to help from an environmental firm owned by a previous SBA Santa Ana District Veteran of the Year, Eric Miller, who provided timely due diligence at closing and performed the Phase I Environmental Report on the property. With the SBA 504 loan to buy the real estate, the $2.4 million deal also financed the renovation of the building and stabilized MachineTek’s finances, preserving an estimated 39 jobs in the process.
Since 2002, AVANA Capital has worked to support the growth of SMBs across the United States. Our goal has always been to work in partnership with each entrepreneur to make their vision a reality through the use of tailored financing solutions.
It has been our pleasure, this past year and always, to work with dedicated community members across the country in supporting their dreams and livelihoods, and in working with our partners to build and strengthen economic stability for all.