Kelley and Steve Cherry were so pleased with the experience of securing a loan to buy one commercial building in Red River that they want to buy another building the same way.
The couple worked with Century Bank to obtain a U.S. Small Business Administration 504 loan to purchase the building they previously leased for their 3-year-old ice cream and sweets shop, L’il Willie’s Shenanigans. They hope to use the same strategy to buy the building from which they’ve operated Shotgun Willie’s Café for the past decade.
The appeal of 504 loans is that interest rates are fixed at a significantly lower rate than traditional banks offer for commercial real estate loans, and borrowers get lots of help from lenders and the certified development companies that evaluate 504 loan packages for the SBA. The nonprofit Enchantment Land Certified Development Company played that role for the Cherrys.
A business owner can only use SBA 504 financing to purchase, build or renovate real estate that the business will occupy; purchase, test and set up equipment that has a useful life of at least 10 years; or refinance a real estate or equipment loan. It is one of many low-interest loans a commercial banker considers when determining the best option for a business.
504 loans are initiated and shaped by the bank and involve the business owner and the SBA-affiliated certified development company. The owner pays a minimum down payment of 10 percent and a maximum of 20 percent.
Because they had owned Shenanigans less than two years at the time they applied for the loan, the Cherrys put down 15 percent, which resulted in a monthly payment that’s not that different from what they paid for their lease. “But it’s nice to be paying for something that’s going to be yours,” Kelley said.
The SBA finances 40 percent of the total loan at a low interest rate for a fixed 10-, 20- or 25-year term, and the bank finances the balance. “The interest rate was almost half of what a commercial real estate loan would be,” said Steve.
SBA’s portion of the 20-year Shenanigans loan can’t be paid off early without a penalty. The interest rate for the bank’s portion of the loan can fluctuate over the life of the loan, but there’s no penalty for paying it off in advance.
While the couple jointly own and manage both businesses, Kelley’s main focus is Shenanigans, and Steve’s is the café. “We try not to be just one of your run-of-the-mill T-shirt shops with mugs that say ‘Red River,’” Kelley said of Shenanigans, which sells ice cream, baked goods, coffee, jewelry and other products oriented to locals and visitors and is known for its small fried pies. “We pretty much sell out of those every day,” said Kelley.
Since getting the loan, the couple has repainted the building and added a deck, said Steve. “We’re putting money back into the business.”
Small-business owners contemplating a 504 loan should understand that the process takes longer than it does for a traditional commercial loan, Kelley said.
“If you have the patience, it’s a good program, especially for businesses that are starting out,” she said. “As the buyer, the more responsive and quick you can be with your information, the better it is—the faster it goes.”
Learn more about SBA and other loan programs offered by Century Bank.
Finance New Mexico Article 745