Small businesses: Flying high on 504 loans

(MoneyWatch) "We take people up in airplanes to 14,000 feet and then throw them out. Will you give us a loan?"

Two banks and the U.S. Small Business Administration said "yes."

As a result, Doug Smith is flying high these days. But then, Smith usually does as owner of Chicagoland Skydiving Center. He's flying even higher as a result of receiving a $1.55 million bank loan to construct his new state of the art location in Rochelle, Ill.

Doug moved to Rochelle in March of last year from his former location in Hinckley, Ill. "We built a road, parking lot, and RV park and we brought in electric and fiber optics. That was phase 1 of the project," he explained.

Phase 2 was far more ambitious. It includes a 20,000 square foot building, aircraft hangars, offices, showers, a restaurant, orientation center, a comfort center, a retail store and more.

"I've had this vision for a decade, and it is now a dream come true," he said. (To have a look at the extensive construction-taking place, check out CSC's Facebook page.)

We were impressed that, in these times, Doug was able to receive two aggressive bank loan offers for a skydiving company.

He ultimately accepted a SBA 504 loan from Resource Bank. The process started with a meeting with SomerCor, a Certified Development Company (CDC) who specializes in SBA 504 loans exclusively. A CDC is a non-profit corporation that promotes economic development within its community through 504 loans. CDCs are certified and regulated by the SBA and work with SBA and participating lenders to provide financing to small businesses.

The SBA 504 program is designed specifically to promote economic development. The program helps healthy, growing businesses finance the acquisition of long-term fixed assets, such as land, buildings, machinery and equipment. It also supports the modernization, renovation or restoration of existing facilities.

To be eligible for a 504 loan, your business must:

• Be a for-profit company
• Have a tangible net worth of not more than $15 million
• And have an average net income of $5 million or less AFTER federal income taxes for the preceding two years prior to application.

In addition, a company must meet the requirements of the local CDC.

"SomerCor explained everything," Doug told us. "I didn't know much about the 504 program and they took me through it step by step."

SomerCor is a consultant to the buyer and to the bank. They help package presentations and they're consultants to the SBA.

The fee for their services was $8,000, but Doug will get it back from SBA, with the exception of the $1,000 application fee once total construction is complete.

After it was determined that Doug's business was eligible for the loan, the next step was to locate banks that are both eligible and interested in working within the guidelines of 504.

The SBA provided 40 percent, Resource Bank financed 50 percent and Doug was required to provide 10 percent of the loan amount.

Locating banks willing to provide the 50 percent is easier than you might think - if you meet the SBA and CDC's lending criteria. There are numerous incentives for a bank to lend through the 504 lending program.

Most importantly, the bank's risk is significantly reduced because it is financing only 50 percent of the loan, yet they maintain a first-lien position on 100 percent of the assets being financed. As is typical for this type of loan, Resource Bank required CSC to move all of its commercial accounts as part of the deal.

By embracing the 504 program, community banks like Resource can create goodwill in their local market. According to Dave Maroo, Commercial Advisor and Doug's loan officer, "Doug's business broadens the community's tax base and stimulates the local economy through job creation and retention. Many local businesses are benefiting from the thousands of people CSC brings to Rochelle every week as well as the members of his staff who live here locally during the season."

Maroo continued, "Because our exposure is only 50 percent, we were able to make the loan. If it were a typical loan without 504, we most likely wouldn't have made the loan. It would have been hard to sell to the loan committee."

Yet, even with all the advantages, how is it that a business whose business is to take people up in airplanes and then throw them out, could possibly acquire a bank loan, let alone a loan for $1.55 million?

As Doug pointed out: "My unique business does NOT fit in the cookie cutter mindset of big banks. The whole idea of aircraft and pushing people out of aircraft caused the big banks to shudder. The small banks I talked to took the time to delve into our business and see if there could be a fit. When the bank that was financing our new aircraft folded, I literally looked all over the world for financing and ended up finding Resource in our own backyard. Dave Maroo had approached us before, but he was very low key. He told us Resource would be there for us if we needed them."

"Thanks to the 504 program and the guidance and efforts of SomerCor, Resource came through for us at the absolute peak of the financial downturn. That's why we're with Resource - they were there when we needed them, and I will take that into account as we continue to grow. I just like the small bank feel. It's more about the relationship," he added.

Doug started his business in 2008. In 2011, 37,314 people were happily thrown from his two aircraft.

"Our new facilities will thrust us to the top of the industry. We have the nicest skydiving center in the world which will attract better staff, more jumpers and the ability to host larger events," he said.

If your business qualifies for the 504 program, then the sky's the limit.