What Are 504 Loans
SBA 504 loans are a fixed-rate, long-term financing option for purchasing owner-occupied real estate and equipment. This loan program was created by SBA to expand capital access for America’s small businesses and fill a market gap in long-term financing. Since the rates are fixed for the life of the loan, and the terms extend as long as 25 years, the 504 is one of the best financing options available for small business owners today.
If you are a small business owner, you are probably familiar with the U.S. Small Business Administration (SBA), but, unfortunately, many are unfamiliar with one of its best financing options. The SBA established a program over 30 years ago called the 504 Loan Program. This program works in conjunction with your bank to allow business owners to receive up to 90% financing for the acquisition, construction, improvement or expansion of commercial property or for acquiring heavy machinery or equipment.
The program essentially consists of three key elements: 50% of the project’s total cost is provided by a lending institution, usually a bank; 40% is provided through the SBA’s 504 Loan Program; and 10% equity is provided by the borrower. (Start-up businesses and single-purpose facilities require a slightly higher equity contribution.) By requiring a smaller down payment, the 504 can help the business conserve their operating capital, while the structure of the program makes it attractive to financial institutions. Plus, the fixed rate and long loan term insulates borrowers from rising interest rates and future balloon payments or call provisions.
WHY SBA 504 LOANS ARE SO POPULAR
Low, Fixed Interest Rates
With the 504, borrowers take advantage of a low interest rate, which is fixed for either 10-, 20- or 25-years.
In most cases, borrowers receive a 90% advance, which preserves working capital for day-to-day business expenses.
The 504 finances total project costs, including not just the costs for land, existing building, hard construction and equipment, but also soft costs like furniture, fixtures, closing costs and professional fees.
No Future Balloon Payments
With the 504, borrowers do not have to concern themselves with saving the large amount of cash necessary for a balloon payment. This eliminates the need for refinancing, additional appraisals and deterioration in property values.
Predictable Monthly Payments
Borrowers lock in a low fixed interest rate, which gives them predictable payments and allows them to easily forecast for future years. So there’s no inflationary pressures and interest rate increases to worry about.
The 504 Loan Program requires a partnership between SBCC and a lending institution, so there’s no need to give up that lending relationship you’ve grown comfortable with.