OAKLAND, Calif., May 25, 2019 /PRNewswire-PRWeb/ -- Loans
backed by the Small Business Administration (SBA), such as the SBA
504 Loan, are the best deals in small business lending. There are
features of the 504 Loan that cannot be found in alternative
financing options. Those benefits however, are often overlooked or
even unbeknownst to small business owners.
For those not familiar, the 504 Loan is an affordable loan
option created by the SBA to support and encourage small business
growth and in turn, improve our economies. The loan allows small
business owners to purchase fixed assets, such as a building or
equipment for their business, with a low down payment and a
below-market fixed interest rate.
The 504 Loan consists of three parts, a conventional bank, a
Certified Development Company (CDC), and the small business
owner/borrower. There is a first mortgage from the conventional
bank that supplies 50 percent of the total project cost, a second
mortgage from the CDC/SBA that provides 40 percent of the total
project cost, and down payment of at least 10 percent from the
borrower. This unique structure is what allows the loan to be
accessible to so many business owners. Banks are more likely to
loan money when the loan is backed by the SBA.
50%: Conventional Lender
40%: CDC
10%: Borrower
The 504 Loan is the most affordable option for small business
owners yet oftentimes, borrowers go straight to a conventional bank
thinking that is the only or easiest way. Applying for an SBA loan
may require a few more steps than a conventional loan however it
saves small business owners the most money. Here is why applying
for an SBA 504 loan is worth it:
1 – Low down payment
The low 10 percent down payment is one of the biggest
attractions of the 504 Loan Program. Conventional loans often
require a 20-40 percent down payment, an unattainable figure for
many business owners. The low down payment opens the doors for many
small business owners to purchase a building that otherwise
couldn't afford it. Certain circumstances require a down payment of
15 percent, such as when the loan is being used to purchase a
special use property or if the business has been in operation for
less than two years. However, this is still significantly less than
conventional financing.
With the 504 loan's low injection, businesses retain precious
working capital. Renovations and soft costs can also be financed,
allowing further cash savings.
2 – Below-market, FIXED interest rate
The SBA second mortgage is a fixed rate tied to the 10-year
Treasury, unaffected by market instability or inflation
expectations. The rate is consistently low and stable, being under
6 percent for the past 10 years. Today, that rate is 4.3 percent
fixed for 25 years.
3 – Long term
The 504 rate has loan options of 10-years, 20-years, and
25-years. It is fully amortized through the life of the loan,
meaning there is no balloon payment at the end of the term. This
long term, below market rate provides small business owners with
affordable monthly payments and enables them to control their
overhead costs for the long term.
4 – Wide scope of uses
The 504 loan is widely known as the commercial real estate loan,
however it can be used for much more. Funds from a 504 loan can be
used for:
Acquisition of real estate (land and buildings)
Acquisition of equipment
Construction and renovation costs
Soft costs
Refinance conventional loans
There is no limit to the total project cost with a 504 Loan. The
SBA portion (40 percent of the total project cost) is capped at
$5,000,000 or $5,500,000 for manufacturing projects or projects
that implement green efficiencies.
5 – Serves most property types, including special purpose
properties
The 504 Loan is well-suited for properties classified as special
purpose, such as wineries, car washes, bowling alleys, auto repair
shops, gas stations, hotels, assisted living facilities, and
fitness facilities. While the SBA provides better leverage and more
favorable terms for all property types, it is especially attractive
for properties classified as special purpose due to the more
restrictive conventional financing available.
6 – Accessible to most small business owners
The SBA's definition of "small" is substantially larger than
what most people assume. The truth is, most for-profit businesses
are eligible for 504 financing. The business must occupy at least
51% of the building on real estate purchases. This requirement
ensures the integrity of the program aimed to help small
businesses, not large investment companies.
7 – It may be the only affordable option
Many small business owners turn to the SBA when conventional
banks say no or offer terms they cannot afford. In particular,
businesses such as startups or those within specialized industries,
have difficulty securing a conventional loan. With a 504 loan, the
partnership with a CDC lowers the bank risk and increases a
business owner's chances of securing a loan with them. CDCs have
longstanding relationships with all types of lenders and can help
find the best bank to accommodate the first mortgage.
8 – Streamlined application process
There are also many misconceptions about how long it will take
to get SBA financing and how much paperwork is required. The CDC
can prequalify potential borrowers in 24 to 48 hours. Then they are
approved by SBA in approximately seven days. The documentation for
the 504 application is generally the same as the documentation
required by first lender and the CDC underwrites the loan
simultaneously with the lender.
9 – Favorable Repayment Options
504 loans can be repaid early and under very favorable
conditions, sometimes with no penalty. Being a unique program, the
504 has unique prepayment conditions as well. After the first half
of the loan term has passed, the loan can be repaid early at no
additional cost. That is, a 20-year loan can be repaid without
penalty in the 11th year or later, and a ten-year loan can
similarly be repaid without penalty after five years.
For the first half of the loan, the penalty is the debenture
rate (typically under 3 percent) on the balance of the loan. That
penalty is reduced by 10 percent each year, reaching zero at the
term's halfway point.
10 – Support from a Certified Development Company
A CDC is a nonprofit corporation built to support economic
development within its community through the 504 Loan Program. CDCs
are regulated by the SBA and strive to be the borrower's advocate
throughout the life of the loan. CDCs complete the paperwork and
guide the borrower through the entire loan process. The CDC not
only helps get the loan funded, but they will also be your partner
for the next 10 to 25 years while servicing your loan.
A CDC is a great resource and source of advice for small
business owners. To provide you with leverage when working on
acquiring a building, a CDC can offer free consultations or a
prequalification under no obligation or fee. A prequalification
letter can give you an advantage when shopping for a building to
purchase.
Are you Eligible?
As mentioned, most for-profit companies in the U.S. are eligible
for the 504 Loan Program. There are 270 CDCs nationwide – research
the best CDC in your community and contact them to see if you are
eligible for the 504 Loan Program. TMC Financing is the number one
CDC in California and Nevada and would be happy to provide a free
consultation and prequalifaction to interested small business
owners. During the past 38 years, TMC has provided over
$9 billion in financing for more than
5,000 businesses. If you would like to learn more about the 504
loan, contact a TMC 504 loan expert today.
SOURCE TMC Financing