SBA 504 Loan and its top 10 advantages
In the very recent past, many small business owners did not even think about applying for a Small Business Administration 504 (SBA 504). These loans are known for their long delays, a flurry of documentation requirements, as well as the well-known shortage of credit professionals capable of completing this loan successfully. Things changed today, the SBA reformulated its systems and banks now prefers lender status, which allows SBA 504 loan applications to be approved at banking level and US Small Business Administration simply confirms the bank’s decision.
The big challenge now is getting small-business owners into these loans; many banks do not find the 504 loan attractive because of its low profitability potential and actually some banks that provide these loans often are not knowledgeable about the SBA 504 program.
Lately, many business owners shopping for a commercial loan for real estate may receive as a first proposal, an SBA 7(a) loan; although the SBA micro-loan program (SBA 7) has an advantage in some flexibility in approving on lenders’ side, this product (SBA 7) isn’t ideal for commercial real estate because its short-term offers, variable interest rates and requires more capital.
The 504 loan offers as much as 90 percent financing of the total project costs for commercial real estate purchases. This allows business owners to preserve more capital for other uses.
Companies can save on interest expenses by opting for the low fixed interest rates that are usually below the market rate.
Longer loan terms allow for smaller monthly payments, which helps a business’s cash flow, prepayments are allowed (generally as much as 20 percent of the principal balance in the first 10 years); business owners can have the best of both worlds between smaller monthly payments when times are tight (downturn) and the ability to prepay when excess cash is available.
Borrowers only put in 10 percent equity, get below-market interest rates and enjoy longer loan amortizations, their cash flow is less affected, and they can still realize all the advantages of purchasing or constructing commercial real estate.
Owning a commercial real estate instead of leasing typically means a significant reduction in real estate expenses as much as 40 percent. Also has an additional benefit of converting a large variable expense (rent) to a fixed cost (mortgage).
Financing closing and other soft costs with the SBA 504 loan can help keep out-of-pocket expenses to a 10 percent minimum.
Without balloon payments, calls or negative loan covenants, borrowers have more control, more peace of mind and less lender micromanagement.
Future sales of properties financed by SBA 504 loans may benefit from having assumable mortgages at today’s low-interest rates, closing in as few as 30 days allows business owners to take possession of their new asset and start reaping the rewards quickly.
SBA 504 loans allow lenders to have senior lien position and a loan-to-value ratio of around 50 percent, which lowers collateral risk.
SBA 504 loan offers small and midsize businesses advantages previously only known to larger enterprises.
Taking a closer look at the SBA 504 loan, it is clear that it is the right choice for many small-business owners. I recommend the use of SBA 504 loan strictly for real estate and equipment purchases. This program is unique because it pairs a Community Development Corporation (CDC) with a lender. They come up with the full loan amount together. The pair will cover 90% (50% coming from the lender and 40% coming from a CDC). The borrower then only has to pay the remaining 10% as a down payment. How would this loan not seem to be so beneficial to both sides?
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