Ivy Hartman: Buying your own building or land for your business had always been part of your plan or maybe you hadn’t considered it until now. Well, our expert today has a vast experience working with small business owners. When it comes to their operational growth and strategies, Christopher Hurn is the co-founder and CEO of Mercantile Commercial Capital, one of the fastest growing companies in America.
They’ve been known for the work that they’ve been doing with small businesses. Welcome to SBTV.com, Chris.
Christopher Hurn: Thank you.
Ivy Hartman: What is the best kept secret when it comes to retail financing for your small business.
Christopher Hurn: Well, the best kept secret for commercial let’s say financing is the products have been around for about 28 years. It’s called the SBA 504 loan. It happens to be what my company always lives with and we believed we’re the first commercial and we’ll always live with this. We’re such big believers and I actually I have one of these loans myself which I can count in one hand the number of my competitors commercial bankers around the country that actually utilize their product and believe it or not, they utilize it. So I’m kind of like that her club for men guy that uses what I actually sell.
Ivy Hartman: Good and you walk to talk.
Christopher Hurn: That’s exactly right. And it resonates with small business owners.
Ivy Hartman: It sure does.
Christopher Hurn: They want to deal with people that are very similar to them. They have to meet payroll every couple of months and they’re creating wealth in the same type of strategies that they’re actually suggesting to others.
Ivy Hartman: Describe some of the pros and cons and also the eligibility of a vital for one.
Christopher Hurn: Sure. Well, small businesses are eligible when they’re for profit, non-publicly traded companies which is about 98% of the small business in America. What’s advantageous for them is instead of just making their landlord wealthy, what I teach people is how to convert the real payments into a commercial mortgage payment to build assets for under balance sheet.
I'm actually buying appreciable asset into build equity and I think the best way to do that is with the 504 loan. What we typically do is we finance 90% loan the cost. It’s very different in commercial banks to financial financing. It is usually 75% to 80% loan devalue.
So we’re actually taking all the cost putting it together two to ten percent down which means it’s about half to a third capital requirement that’s typical bank requires.
Now, you know as well as I do that capital gain for small business owners where we have to put half to a third amount down instantly you can use your equity savings to really put it back in your business and grow your business fast. So that’s one of the huge advantages.
The other big advantage that a lot of folks find out quickly about is the amortization period is a bit longer than in an ordinary bank. So, ordinary banks these days are usually in 15 to 20 year terms for commercial real estate. We’re usually doing 25 or 20 year terms what that means is the monthly is less which again goes right back to cash. The cash flows to business can be less impacted when they buy commercial real estate which is going to be one of the biggest purchases they’ve ever done.
Ivy Hartman: Okay, then why it is that we see so many retails especially small business owners renting versus buying their commercial real estate?
Christopher Hurn: That’s a great question. I think what happens is when you first go into business and most people still have to have a facility to operate the business out of and the cheapest and easiest way to do that is to really rent some property.
I've been an advocate for years and years. I have people that just start their business and I want to immediate buy commercial real estate. I guess they read my ads and then are into it. I have to tell them. No, no, get yourself established in your market place. Come back and see me in three or four years when you have some capital and it’s really time for you to go ahead and utilize this wealth creation strategy by owning your commercial property. So that’s what we do.
Ivy Hartman: Okay, Chris. How is the 504 loan program different than a conventional loan from the bank?
Christopher Hurn: Well, the over reason wise what I call the best kept secret in commercial real estate financing is the structure like I said, 90% loan the cost which means there is a 50% first mortgage which is just the regular bank loan. There is a second mortgage for 40% with a total project cost and the 10% equity from borrowed. That 40% piece is really critical. It’s 44% of the total loan amount and it’s the cheapest capital available for small business owners, the least expensive.
What happens is monthly a bond is issued and college endowments, pension funds, folks like that actually purchase it because it is the forfeiting that government guarantee on it they actually can accept the lower yield and so that yield becomes what the borrower and they’re paying is their interest rate.
So it’s about 150 basis points below market rates and it’s fixed for 20 years. There is simply easy fails like it anywhere after in the marketplace and that’s why when people are made aware of the 504 loan it’s an out brainier. They understand this is a tremendous commercial loan product.
Ivy Hartman: And now are you getting 90%? You're not just getting 90% of the value of the business, you’re getting 90% of the total estimated costs.
Christopher Hurn: To all the cost, that’s correct.
Ivy Hartman: Which is different than a typical loan.
Christopher Hurn: Yeah, most conventional bankers will do the lesser of appraised value or purchased price when you’re buying commercial real estate. But this is actually, in some cases, I can ground up a structure which we do a lot of because we’re including some of the construction cost. Soft cost like permitting fees, architecture engineering fees, construction contingency, interest and putting that all together. It could be as high as 95% loan devalue.
Ivy Hartman: Wow. That is good that commercial capital knows all that stuff. How to be eligible for this 504 plan? Is it for everybody?
Christopher Hurn: Pretty much if it’s a for profit, non publicly traded small business, it’s probably be going to be eligible. I mean everybody from manufactures to distributors to physicians, veterinarians, restaurant tours, hoteliers, day care operators and the list goes on and on. Probably, there is clearly more people that are eligible than are ineligible.
It could be a gambling concern. You couldn’t be a club that restricts patronage. Those are two areas that would not be eligible. It can't be for a purely just a rental company of real estate. It has to be for an owner user.
So it’s really for the person who’s been—it’s for the environmental firm that’s been in the rental facility for five years and finally woke up one day and said, “You know what? I've been throwing my money away on rental on these years. Hey, I've owned something and I can do it” and that’s exactly what this program is looking for.
Ivy Hartman: And definitely location is still key.
Christopher Hurn: Sure.
Ivy Hartman: Wonderful tips. Thank you very much. You’ve learned the secret here to what the secret is to commercial retail capital in your small business from Chris. If you want more information you can go to our website at 504Experts.com or look for more articles and segments from Chris right here on SBTV.com where small business is our only business.
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