Many small-business owners wouldn’t look twice at U.S. Small Business Administration (SBA) 504 loans. These loans were known for hefty delays and a barrage of documentation requirements, as well as a scarcity of lending professionals capable of closing them successfully.
But things have changed. The SBA has revamped its systems, and more banks have preferred-lender status. This allows for approval at the bank level; the SBA simply confirms the bank’s decision.
Today, the problem is getting small-business owners into these loans. Many banks do not find the 504 loan attractive because of its low profitability potential. In addition, some banks that provide these loans often are not knowledgeable about the 504 program.
Many business owners shopping for a commercial loan may be presented with an SBA 7(a) loan first. This product isn’t ideal for commercial real estate because it’s short term, offers variable interest rates and requires more capital.
Here are 10 reasons why the SBA 504 loan may be the best loan product for small- and midsize-business owners:
1. 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.
2. Below-market interest rates: Businesses can save on interest expenses by not accepting market interest rates when below-market, fixed interest rates are available with the 504 loan.
3. Longer loan amortizations: Longer loan terms allow for smaller monthly payments, which helps a business’s cash flow. In addition, because 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 — smaller monthly payments when times are tight but the ability to prepay when excess cash is available.
4. Less impact on cash flow: Because 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.
5. Reduction in real estate expenses: Owning commercial real estate instead of leasing typically means a significant reduction in real estate expenses — as much as 40 percent. Owning also has the added benefit of converting a large variable expense (rent) to a fixed cost (mortgage).
6. Financing available for closing and other soft costs: Financing closing and other soft costs with the 504 loan can help keep out-of-pocket expenses to a 10 percent minimum.
7. 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.
8. Thirty-day closing: Closing in as few as 30 days allows business owners to take possession of their new asset and start reaping the rewards quickly.
9. Assumable loans: Future sales of properties financed by 504 loans may benefit from having assumable mortgages at today’s low-interest rates.
10. Best deal overall: This loan offers small and midsize businesses advantages previously only known to larger enterprises.
When you take a closer look at the SBA 504 loan, it is clear that it is the right choice for many small-business owners.
Marcus Mavakala is CEO ofVanto Hospitality Capital Advisors, LLC. Vanto focuses primarily on the U.S. Small Business Administration’s 504 loans, but the company also offers all other business loan products. Reach Mr.Mavakala at (877) 679-4455 or firstname.lastname@example.org
SBA 504 Loans – Requirements
$750,000 to $6Million
>51% Owner Occupied
Minimum Personal Credit Score (FICO)
650 – No Bankruptcy
-Special Use Start-ups
-Hotel/Motel (temporarily discontinued)
Minimum Equity Injection
-Prior Ownership & Management Preferred
TBD (Based on Term)
Other sources of DSC
If Start-Up, 1.20x from outside source
Collateral (1st Position)
SBA Interest Rates
SBA 504 Loan Program – FAQS
SBA loans for healthy expanding businesses.
Loan fixed rate below market financing.
Financing for fixed assets: real estate, machinery, and equipment.
SBA 504 loan term of 20 years for real estate, 10 years for machinery and equipment.
What are the Advantages of the 504 Loan?
Down payment requirement of only 10% or more of the customer.
Lender/Bank can provide 90% financing for the customer.
Lender/Bank can participate in larger transactions.
Lender/Bank enjoys the first lien, lending 50% of the value at market rate and fees.
Who is Eligible for SBA 504?
Tangible net worth not to exceed $8.5 million.
Net profit after taxes not to exceed $3 million during previous 2 years.
What is Eligible Use of Funds?
Purchase land, purchase or construct the building.
Modernize, renovate or improve building.
Purchase machinery and equipment with 10-year useful life.
Soft costs and/or closing costs.
Total project size $125,000 minimum.
No maximum total project size.
Who are Ineligible Borrowers?
Lending institutions, insurance companies.
Gambling concerns and private clubs.
What is Ineligible Use of Funds?
What is the SBA 504 Loan Products?
Rate: 5 or 10 year Treasury bond rate plus approximately 210 basis points.
Structure: Healthy Expanding Business
50% Lender/Bank in 1st Lien
40% 504 in 2nd Lien
Start-up or Special Purpose Building will require 15% equity.
Start-up and Special Purpose Building will require 20% equity.
What is the Private Lender Participation?
The minimum 10-year term on real estate, minimum 7-year term on machinery and equipment.
Market rates and fees.
Covenants established by the lender.
One time 1/2% fee to SBA on Lender’s participation.
What are the Fees for the Small Business Owner?
Debenture Fees: 2.65% of 504 loans.
All of the fees can be financed.
Please note new changes and waiving of fees below.
Are there Other Requirements?
Personal guarantee of 20% or greater owner.