SBA Hot Topic Tuesday — The 504 Lending Program is an Effective Mean of Economic Development Activity

Guest Editorial
By Tom Wallace
President, IDS Corporation

SBA Hot Topic Tuesday — The 504 Lending Program is an Effective Mean of Economic Development Activity

Last week, The Coleman Report featured an informal survey which indicated that 23% of the respondents felt that CDCs were not prudent economic development agents.

If math serves us well, that would imply that some 77% of the respondents felt that CDCs are, in some sense, somewhat prudent economic development agents.

If the main focus of CDCs is to be agents of economic development using, then somewhat favorable views of that performance should be taken as a positive for the industry. But just how positive, with allowance for how the question is posed, is a 77% non-negative rating?

Recent surveys (Gallup 7/2015 & Harris 5/2013) of ‘favorable” opinions provide some context for favorability ratings:

The Congress: 8%
The Supreme Court: 44%
President Obama: 51%
His Holiness Pope Francis: 61%
His Holiness The Dalai Lama: 64%

Wow. Nobody saw those last two coming…

Economic development, particularly in underserved markets, is a primary mission for the SBA. If SBA and its’ partners cannot effectively deliver on the mission, then all SBA programs are legitimately at risk. Across the country there are some 250 CDC licenses which deliver the 504 program. Many of these CDCs are parts of larger platforms for economic development, many of them serving rural or urban core markets. In short, the underserved markets which are SBA’s reason for being.

SBA has mandated greater oversight of CDC operations by each individual CDC’s Board of Directors. Board Members now annually certify their understanding of their responsibilities. These independent Boards of Directors should now be given the opportunity to demonstrate both their involvement and their ability to drive results. This includes the range of compensation issues, which are, in any event governed by IRS standards for not-for-profit entities such as virtually all CDCs. This also includes the means of reinvestment of excess funds in the community, ranging from: technical support, to Community Advantage participation, to legitimately the expansion of the reach of the 504 program itself.

CDCs do not exist in a vacuum. They are part of a process, specifically they are the face of the SBA 504 program which the end users, small businesses and lenders, see. The real question is not “are CDCs effective?”, it is whether or not the whole process is effective? To put a fine point on the question: is the 504 lending process an effective means of economic development? (Given the demonstrable benefits of long term fixed rate capital asset financing and the preservation of working capital by minimizing equity requirements, the benefits of the 504 product itself, are not at issue.)

In the coming months, SBA will be promulgating regulations and final rules on both 504 refi franchises and affiliation issues. These are opportunities to broaden the reach of the program and to do so in a dramatically more streamlined fashion. There is an opportunity for SBA to manage the outcome of the process, rather than the specifics of a single component of the process. CDCs want to engage with SBA to make the process a more effective vehicle for the end users. That conversation will likely produce immediate positive results.

A conversation on dictating specific accounting and financial policies will either bog down in an effort to write absurdly detailed rules to account for the diversity of CDC platforms across the country or create a “one size fits all” standard. The only assured result will be unintended consequences.

Our end users deserve better of us.