Commercial lending officers can fit that category by financing businesses that will add value to their communities.  Their banks can help offset some of the risk by utilizing alternative financing.

As one of the major alternative financing programs, the SBA 504 loans, is observing its 25th anniversary this year, it’s a good time to review why that program is as viable as ever.  And it’s also a good time for lenders to re-focus on the array of lending alternatives that help them support more good business projects in their communities.

Alternative loan programs such as SBA 504 loans are designed to plug gaps in financing available to business borrowers who may have trouble qualifying for conventional loans.  They also are aimed at accomplishing a purpose such as helping cities revitalize older business districts, rural development, expanding exports, or helping women, minorities and veterans get established as business owners.

The 504 program is extremely flexible in meeting the needs of businesses.  It has identified these areas that the loans can be used:

• Land and new building construction
• Buying an existing building
• Building renovation
• Machinery and equipment
• Asset-based company acquisitions
• Leasehold improvements (in some cases)
• Soft project costs

Nearly any business can qualify for a 504 loan, as long as it: is for-profit, has less than $7 million net worth, and average income of less than $2.5 million the past two years.

We’ve written before about the advantages SBA 504 loans offer borrowers.  Because 40 percent of the loan amount is guaranteed by the SBA, lenders can offer their borrowers the opportunity to invest as little as ten percent down and repay the loan in twenty years with a fixed interest rate.

But what’s in it for banks?  There are several advantages; notably the opportunity to share risk and sustain a smaller loss in the event the project fails.  A bank can finance larger projects and multiple businesses, thus pumping more money into its local economy and diversifying the bank’s risk.

Several Indiana banks successfully market their 504 programs.  “It gives us a competitive advantage if we are the first lender to the table with a 504 package,” says Bruce Burkart of 1st Source Bank in South Bend.

Several banks

• Use the 504 for their best customers
• Build loyalty by working with borrowers
• Adjust incentive program for loan officers so there is equal incentive in using the 504 program (perhaps count 90% interim loan towards goal rather than only 50% permanent)
• Know when their existing customers lease expires, so they can be ready to offer a program to help the customer buy land and a building

SBA 504 loans are one offering in a bank’s arsenal of alternative financing programs.  There are SBA 7(a) loans, and various programs aimed at groups such as Lynx Capital for minority loans and mezzanine funds like the Indiana Community Business Credit Corporation.

It pays to have a good knowledge of your inventory.

Larry Lux of Shelby County Bank has been on a roll lately.  He has used SBA 504 financing for five companies in 2006.  They include a molder of micro plastic parts, a woman-owned firm that applies the sealants to concrete floors in the new Lucas Oil Stadium in Indianapolis, and financing to help a family purchase one of Shelbyville’s most well-loved dining establishments.

Larry Lux of Shelby County Bank has been on a roll lately.  He has used SBA 504 financing for five companies in 2006.  They include a molder of micro plastic parts, a woman-owned firm that applies the sealants to concrete floors in the new Lucas Oil Stadium in Indianapolis, and financing to help a family purchase one of Shelbyville’s most well-loved dining establishments.

“As a small community bank, most of our clients are small business’, which must compete with the big boxes and super stores.  To survive, our clients must become better managers, offering competitive prices with superior service.  The SBA 504 loans really help the small business succeed,” says Lux.

“The advantages of the 504 are a reduced down payment that allows the client to use this extra capital for machinery or inventory.  In addition, the 20 year fixed rate allows long-term planning.

“The advantage to the lender using the CDC is their willingness to meet, educate, and work with the client.  Most businesses fear the SBA loan process, but the Statewide CDC takes a great loan program and makes it pleasant,” concludes Lux.

“We get a lot of mileage out of 504 loans.  Our bank can do so much more with them than we could by ourselves,” says Lux.

There are plenty of good reasons to find out about alternative business financing.  But the big reasons are: they help your bank do more good, and build your bank’s image at the same time.