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.
Check out below the top 10 reasons why the SBA 504 loan is one of the best loan products for small and medium business owners:
- Capital preservation
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.
- Interest below the market rate
Companies can save on interest expenses by opting for the low fixed interest rates that are usually below the market rate.
- Longer loan amortizations
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.
- Less impact on cash flow
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.
- Reduction in real estate expenses
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 available for closing and other soft costs
Financing closing and other soft costs with the SBA 504 loan can help keep out-of-pocket expenses to a 10 percent minimum.
- No balloon payments, calls or covenants
Without balloon payments, calls or negative loan covenants, borrowers have more control, more peace of mind and less lender micromanagement.
- Assumable loans in thirty-day closing
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.
- Best deal and lender benefits
SBA 504 loans allow lenders to have senior lien position and a loan-to-value ratio of around 50 percent, which lowers collateral risk.
- Excellent loan-to-value – typically 50 percent or less
- Alleviates legal lending limit concerns
- Pricing flexibility on first mortgage portion
- First mortgage portion may be sold on the secondary market
- Best deal and borrower benefits
SBA 504 loan offers small and midsize businesses advantages previously only known to larger enterprises.
- Long-term, fixed-rate financing
- 20 years on real estate, 10 years on equipment
- Low equity injection from 10 to 20 percent preserves working capital
- Short-term assets remain lien-free to support other financing needs
- Flexible ownership options allow borrowers to choose the ownership options that work best for them
Conclusion and Recommendation
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?
P.S. As always, please take a minute to leave a comment on my blog. I want it to be a conversation rather than a rant from my soapbox.
P.P.S. And don’t forget my constant reminder: we’re still lending! Call 800-722-5956/email: firstname.lastname@example.org/fax 877-624-4455/live chat with us on the next wealth-creating commercial property ownership loan you know about.