Why This SBA Real Estate Lender Struck Out on His Own — Again
Like residential lenders who pride themselves on helping consumers achieve homeownership, Chris Hurn waxes poetic about helping his clients to move up in the world and become more financially independent.
One difference: he's a commercial lender.
Hurn's firm, Fountainhead Commercial Capital, concentrates on a single niche product: the Small Business Administration 504 program, which finances the purchase of real estate and other equipment.
"I'm passionate about building wealth for small business owners, for them to convert their facilities from a renting situation to an owning situation," Hurn said. "Much like people move out of apartments into homes, the same thing applies for owners of small to midsized businesses. At some point in the business cycle, once you've proven your concept, I think it makes tremendous financial sense to pay yourself the rent payment from your company as opposed to making your landlord wealthy."
Fountainhead, the nonbank lender he started in Maitland, Fla., this year, is Hurn's second go as an entrepreneur in this type of lending, a hybrid of commercial real estate and small business lending. In 2002, he co-founded Mercantile Capital Corp., which specialized in lending to small business owners (first in Florida but then the company began operating nationwide) using the SBA 504 program looking to purchase a property to house their company.
"I'm a big believer in this space," Hurn said. "I've been in this space for more than 17 years now and I think it is a good opportunity now." Small business lending "has been down for the last couple of years for a variety of different reasons," he noted.
But now the economy is recovering, and demand for small-business loans, which bankers say remained weak well after the recession, is picking up. Banks have been adjusting business models to meet it. But they now face competition from a host of nonbank startups and a perception that, since the 2008 financial crisis, banks have been unwilling to finance small enterprises.
"We're going to do some things I did at my previous company and we're going to do some things that are a lot bigger and better," Hurn said, with specifics to come in the next few weeks.
He added he still gets "pretty jazzed" about describing the benefits of the SBA 504 program to small business owners, especially because he is one himself.
The SBA 504 program has some very tight requirements, including limiting a business' tangible net worth to less than $15 million and an average net income less than $5 million after taxes for the preceding two years. Proceeds cannot be used to purchase property that will be rented out.
In 2010 Hurn and his partner sold Mercantile to Orlando-based Old Florida National Bank. Among the advantages to the deal Hurn cited at the time was that Mercantile could use bank deposits to fund loans, while expanding its customer base given Old Florida's focus on small business customers.
This past October, Old Florida reached a deal to be acquired by IberiaBank, headquartered in Lafayette, La. Hurn saw this sale as an opportunity to return to entrepreneurship and created Fountainhead.
"It's a little taxing at the beginning, but it's very fun to start over and build something from scratch again," Hurn said.
But he is not thinking small either, already bringing a team of six people on board at Fountainhead plus three others who will join shortly and "hit the ground running."
Hurn started his lending career with GE Capital and then moved on to Heller Financial before starting Mercantile. One of his reasons for starting the firm was that he felt lenders were failing to meet the needs of small business clients who wanted to own their property. Those needs still remain today.
One of the differences between Hurn's old and new companies will be that while Mercantile concentrated on making interim second mortgages, Fountainhead will do those loans as well as ground-up construction loans and first mortgages funded through the SBA 504 program.
Being able to buy a property to house one's business is a "wealth-creation" strategy for small business owners, and that benefit could last for generations. "That to me is the exciting purpose behind why we do what we do," Hurn said.
"All healthy small to midsized companies should own their real estate," except in the rare cases where it doesn't make sense for them, he said.
"This really is allowing Wall Street-type financing to Main Street businesses," since the SBA 504 program offers a long-term below-market fixed interest rate on almost half of the loan, by virtue of a monthly government-guaranteed bond offering.
Another benefit is a lower down payment than stand-alone bank financing.
There is still a void when it comes to use of the SBA 504, even though Hurn added it is being used more today than when he started Mercantile in 2002. There are plenty of small business owners who need to learn about this option (as opposed to other forms of financing, including traditional commercial real estate loans from banks and the SBA 7(a) program) and he is willing to continue spreading the word and get it into the forefront of people's minds.
"I think I'm doing my small part to help accelerate entrepreneurialism in this country and help build tomorrow's big S&P 500 businesses," Hurn said.