Yolanda Duckett, founder of Duckett Kids Care (Dorgan Young/LABJ)
It's been nearly 20 years since Los Angeles native Yolanda Duckett first opened Duckett Kidz Care Inc.
Since then, she and a small staff of employees have been operating 23 hours a day, seven days a week, except for major holidays, from her South Los Angeles home.
“I have the capacity to handle 14 kids at a time, but the nature of childcare means they don't all come at the same time and it varies from day to day,” Ms Duckett said.
As business continued to grow, Duckett wanted to expand, but her biggest obstacle was not knowing how to fund the venture.
Then last year, she learned about the Small Business Administration's 504 loan program, which offers long-term, fixed-rate loans to borrowers who own for-profit businesses and want to purchase real estate and equipment or improve existing facilities to grow and create jobs.
Loan amounts are generally capped at $5 million.
The program features a unique 50-40-10 structure in which borrowers contribute only 10 percent, with half of the loan package provided by a bank or other lending institution and the other half backed by the SBA's community-based partners, called Certified Development Companies.
Duckett received the loan through CDC Small Business Finance, a mission-driven, nonprofit lending institution that is one of several organizations under the Momentus Capital brand.
Mission-based lenders are committed to helping borrowers who wouldn’t traditionally be able to get financing.
She then purchased a property on East Compton Boulevard in Compton and plans to open a second location there at the end of March.
“Without this financing, we would not have been able to expand our business,” Duckett said. “A traditional commercial loan would require about 25 to 35 percent down, which would not have provided enough capital to purchase equipment or renovate our building.”
She plans to hire at least 10 full- and part-time employees at the new location.
Yolanda Duckett, who is working in the childcare business. (Dogan Young/LABJ)
“This loan has changed my life,” she said. “I will be able to make a real impact in an area that is in desperate need of child care services and jobs.”
7(a) Programme
While Duckett secured a 504 loan, it's not his only option.
The Small Business Administration also has other loan programs, including 7(a), which provides up to $5 million to for-profit businesses.
Unlike the 504 loan program, which is typically used to finance fixed assets, the 7(a) program allows borrowers to use the funds for a variety of purposes, including working capital, business acquisitions, partner buyouts and acquisitions, equipment, inventory, real estate purchases, and refinancing business debt.
There is also the Community Advantage Small Business Lenders program, which is designed to provide capital to small businesses in underserved markets by making 7(a) loans available to mission-driven lenders.
The small business lending company would be created after the long-running Community Advantage Loan pilot program ends in fall 2023 and would provide up to $350,000.
Susan Lamping, vice president of sales for CDC Small Business Finance, said the Small Business Lending Company program gives mission-based lenders that were participants in the Community Advantage program a more secure position in the SBA lending space.
“Community Advantage SBLC loans are offered by non-bank, mission-based lenders with larger credit limits than traditional lenders,” Lamping said, “which allows the lender to think outside the box, stretch the boundaries a little bit, get a deeper understanding of the customer's situation and learn more than just what's on paper.”
“Ultimately, this gives our clients a better chance of loan approval and access to much-needed capital for growth,” Lamping said.
According to figures released by the SBA in October, the agency supported 4,781 loans ($1.455 trillion) to Black-owned businesses and more than 7,700 loans ($3.06 trillion) to Latino-owned businesses through its 7(a) and 504 programs in fiscal year 2023. These figures represent a significant increase from 2020, when there were 1,718 and 3,877 loans, respectively.
A tale of two markets
While the number of minority business owners benefiting from these loans may be on the rise, Tony Balengo, director of commercial real estate at CDC Small Business Finance, said the agency has seen a decline in the total number of 504 loan applicants since fall 2022.
“The 504 is a well-known product and we expect the situation to return to normal in the near future,” Balengo said.
Eric Daniels
Eric Daniels, head of SBA lending at U.S. Bancorp, sees a similar trend.
“Traditional 7(a) and 504 SBA lending was very strong in 2018 and 2019,” said Daniels, who is based in Pasadena and oversees operations across the U.S. “When the pandemic began in 2020, many businesses received Paycheck Protection Program loans to bridge operations. This was followed by additional government stimulus such as fee waivers, which reduced businesses' cost of capital and led to a strengthening of 7(a) and 504 lending in 2021.”
“Then interest rates increased through 2022 and into 2023,” Daniels said. “As interest rate increases began to slow, demand picked up in the second half of 2023.”
As inflation falls and the Federal Reserve signals the possibility of cutting interest rates, Daniels expects things to return to normal.
“The longer duration of SBA loans has led to increased interest from businesses looking to grow, restructure debt or preserve capital,” Daniels said.
Jennifer Davis, senior vice president of business development at TMC Financing, said the number of applicants seeking loans to expand their businesses is down, but the number of people looking to refinance existing SBA debt is up.
Jennifer Davis
The nonprofit mission-based lender administers below-market, fixed-rate SBA 504 loans to small business owners looking to buy, build or refinance commercial real estate.
In 2023, TMC administered 319,504 loans totaling $417 million in SBA loans in Los Angeles County, a notable decrease from 2020, when it administered 369 loans totaling $452 million.
Davis said that despite the uncertainty surrounding the pandemic, the simultaneous availability of stimulus funds and historically low interest rates has created a rare and lucrative opportunity for small business borrowers.
Davis said banks have become more cautious in their lending approach since the peak of the pandemic.
Davis said current high interest rates and strict lending standards have made property owners hesitant to put their assets on the market, leading to a shortage of available industrial properties. He said he's also noticed an increase in escrow cancellations recently.
“In the current climate, buyers are becoming increasingly cautious and will quickly reconsider a deal if any issues arise,” Davis said.
Chris Ledesma, senior vice president of SBA lending at Wells Fargo, has a different view.
“We're seeing strong activity, especially in Southern California,” said Ledesma, who lives in Sacramento. “Interest rates are higher and money may not be flowing as freely as it did during the pandemic, but businesses need to grow, and many are choosing both our 7(a) and 504 products to achieve that growth.”
Ledesma has seen an increase in requests to refinance traditional commercial loans as well as existing 504 and 7(a) loans to secure more stable interest rates.
SBA Rule Changes
Last August, the SBA implemented several changes to make it easier for small businesses to obtain funding through its 7(a) and 504 loan programs.
For example, the SBA has relaxed eligibility criteria, reduced the financial documentation required for loan approval, and announced updated credit policies: credit score/history, earnings or cash flow, and equity/collateral are now the primary factors used to calculate creditworthiness.
Additionally, 7(a) borrowers can now use funds for partial transfers of ownership.
Partnership rules have also been simplified, with the term “partnership” now defined as an owner and/or company holding more than 50% of the shares of another entity in a similar line of business. This change will make loans more accessible to more applicants.