Clarice the Commercial Lender asked me the other day whether 504 loan funds could be used to finance a business that leased trailers to other businesses. I learned long ago to get a clear idea of what I was being asked before I answered. It went this way:

What do you have in mind? Are you talking about a trailer like a U-Haul that may or may not be hitched to a motorized vehicle to haul equipment and household goods? Or are you talking about a trailer as in a mobile home park?

I’m asking because a CDC client recently financed a U-Haul franchisee, and I was confident the franchise was on the list. On the other hand, during an SBA loan policy review, another client changed its policy, as it allowed for financing mobile home parks, which is not eligible. (SOP 50 10 6 pg. 142)

CLARICE. No, it’s not that. Not a mobile home type trailer. And not any kind of franchise I know of. They buy trailers suitable for moving equipment or sheep and cattle and lease the trailers to businesses. I’m asking because the business sure sounds passive to me.

ME. Sounds that way, doesn’t it? But let’s check out the SOP.

First, look at page 143.You’ll see that businesses engaged in leasing equipment are eligible. But there’s also a reference to the section on page 141 stating that businesses engaged in lending are not eligible.

CLARICE. Uh Huh. Yeah, I saw that. So what does it mean?

ME. Well, let’s say that Adam Equipment Leasing rents equipment to other businesses. Under the terms of the rental agreement, regular payments are made and the title to the equipment never changes. At the end of the lease Adam Equipment still owns the equipment. SBA wants to make sure we realize that this type of business is eligible.

But let’s say that Eve’s Rentals pretty much does the same thing except that it provides financing to its customers. It’s not unusual for a business to finance its credit sales and such businesses are eligible. But it turns out that Eve’s Rentals earns more income from financing sales than from the actual sales. In fact, more than 50% of its revenue is from financing its sales, so Eve’s Rentals is not eligible.

So, Clarice, if your borrower leases trailers—for rental only—they should be eligible for SBA 504 financing. All clear? Go ahead with your application. And call on me any time.

Richard Jeffrey
Senior Associate CDC/504 Program