An established manufacturing company in western Pennsylvania experienced a cash flow issue when several large customers required extended payment terms for products. The manufacturer’s line of credit was stretched due to the working capital strain necessary to support their higher receivables, which created a borrowing need. Though the manufacturer has a longstanding relationship with their bank, the bank’s overall loan exposure when considering line, term and mortgage loans, made extending additional financing challenging, especially when cash flow was already tight.
Because the business had equity in real estate with its three locations, the bank recognized an opportunity for a 504 refinance and partnered with Pursuit. The $6.3 million project allowed the business to refinance mortgages on all three locations as well as obtain over $1.0 million in cash-out that they used to cover eligible business expenses ($500.0 was used to reduce their existing line balance and $500.0 was retained as cash on the balance sheet).
The 504 refinance provided the borrower with $1.0 million in capital to support operations, reduced their monthly debt service payments by $30,000 per month, and increased their current ratio from 1.6 to 1.8, all without requiring additional cash down-payments from the customer. Closing costs were financed into the loan as well. The debt service was substantially reduced by re-amortizing the debt and from the advantageous terms provided by the 504 second mortgages, including 25-year terms and a 3% fixed interest rate.
Importantly, the 504 also allowed the bank, which previously only had two of the three mortgages on the properties, to help their small business customer, increase their relationship by having mortgages on all three properties, improve their collateral position with less than 50% LTVs on the buildings and only increase their overall loan exposure to the client by $100,000.
Per Ryan Lockhart, Vice President: “It is easy for bankers to remember an SBA 504 loan when the borrower request is to buy or renovate real estate. However, with the benefits provided under the 504 refinance product, bankers need to remember to think of the 504 when the borrower request is for working capital.”