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The News Journal
The telephone call Jamie Compton had been waiting for arrived Friday afternoon.
Compton, manager of the Smyrna Diner, got word that her family's $2.4 million loan request had received a final OK. Compton, who runs the diner along with her mother and husband, said they plan to use the money to build a larger restaurant in
Smyrna
to replace the cramped building they now use. Seating will nearly triple from the 75 seats they have now.
With the loan dollars now available,
Compton
said, they hope to start construction soon and move into the new restaurant about two miles south of the current location on Del. 13 in the late spring.
"Without this loan, we wouldn't be able to do this,"
Compton
said. "It's really so much help to have this money."
The Smyrna Diner is one of a growing number of
Delaware
small businesses getting access to sizable loans -- amounting to as much as $4 million -- through a program sponsored by the U.S. Small Business Administration.
The federal agency has long offered loan guarantees to banks as a way of encouraging them to extend loans to small businesses. But the loans often are for relatively small amounts. The average SBA-backed loan in
Delaware
in recent years has been $117,000.
For a major expansion -- or construction of a new building, such as the one the Smyrna Diner plans -- small business owners may need loans of more than $1 million. That's where the SBA's Certified Development Company (504) Loan Program comes in, said Jayne E. Armstrong, director of the SBA's
Delaware
office.
Under this program, borrowers can get the sizable loans they need through a combination of public and private financing. The number of 504 loans in
Delaware
has been climbing. In the 2006 fiscal year, which ended Sept. 30, 17 of these loans were granted to
Delaware
businesses. That's the most ever, and more than double the level reached in 2005, Armstrong said.
The SBA's Delaware office has been working to promote the loans, which offer attractive features including low down payments and a reduced interest rate, Armstrong said. The lower rate and down payment can translate into thousands of dollars in savings.
"It's a matter of educating small businesses that this program is available," Armstrong said. "It can be a really terrific opportunity for the small-business borrower."
The 504 loans can be used for major projects: purchasing land, construction of new facilities, renovations, or the purchase of machinery and equipment. There are, however, restrictions that limit what the business can use the loans for. The money, for example, can't go to for working capital or inventory or debt refinancing.
The financing combines a conventional bank loan with a secondary loan that's granted at a discounted interest rate. The conventional portion lent by the bank represents 50 percent of the total amount. Forty percent of the loan comes through a collaboration of the SBA and a "certified development company," a nonprofit corporation that promotes economic development. The remaining 10 percent must be put up by the business owner as a down payment. Business owners can start the application process by contacting one of the certified development companies or a local bank.
Before a 504 loan can be granted, the bank must certify that it would be unwilling to finance the full amount without the SBA's involvement, said Charles H. W. Effinger Jr., executive director of the Wilmington Economic Development Corp. He said that requirement is meant to ensure the federal loan program isn't crowding out private-sector lending.
The Wilmington Economic Development Corp. is one of four certified development companies involved with providing 504 loans in Delaware. The others are the Chesapeake Business Finance Corp. of Washington, D.C.; DelVal Business Finance Corp. of Philadelphia, and Mid-Atlantic Business Finance Co. of Glen Burnie, Md.
Effinger said the portion of the loan supplied by the SBA and certified development company carries a fixed interest rate that can be more than 2 percentage points below a commercial loan rate. The 50 percent of the loan that's provided by a bank would have a higher, market-determined interest rate that typically would be variable.
Small businesses should find it appealing that a portion of the loan has a fixed interest rate, Effinger said, because it lends predictability to budgeting.
Compton, manager of the Smyrna Diner, said the 504 loan program provides a much-needed helping hand to small businesses, especially restaurants such as hers that face fierce competition. She said other small business owners in Delaware should consider the loans when it comes time for expansion or relocation.
"We needed this loan to stay competitive," Compton said. "This had been a little town, but it's really growing, and we need to grow, too."
The benefits do come at a cost. Business owners who apply must be ready for a complicated application process because several parties are involved.
"It's not easy," said Joseph Farley Jr., chief financial officer of Farley Printing Co. in Wilmington. "There is a lot of paperwork with these loans."
But Farley said he's happy his family-owned commercial printing company went with a 504 loan in 2002 because the business was able to get a fixed rate of 3.25 percent for 10 years, saving thousands of dollars in interest payments. Farley Printing used the $775,000 loan to relocate within Wilmington and double the size of the company's facility to 20,000 square feet.
"That low rate, and getting it fixed, made the whole process worth it," Farley said.
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