Apart from the many values small businesses contribute to an economy, the jobs they create add up to the development of a community. But these small businesses often face many challenges that might affect their growth due to the lack of business capital. Through the Small Business Administration, the U.S. government makes available loan programs these businesses could take advantage of to support several projects.
Through the SBA, the loan is extended from preferred financial institutions or credit unions to the borrowers. Because small businesses have a diverse need for funding, the SBA has provided different loan programs for different purposes. These loan programs often have terms the borrowers will have to keep up with. One of such loan programs that the SBA offers is the SBA 504 loan.
Here, let’s explore all you need to know about the SBA 504 loans.
What is the SBA 504 Loan Program?
This is one of the loan programs the U.S. government provides through the SBA (Small Business Administration) to small or medium-sized businesses.
In collaboration with Certified Development Companies (CDC), the SBA makes this loan available to promote business in communities. In doing this, they get to accept a relatively low down payment on this loan.
The SBA 504 loan offers a long-term repayment period between 10-20 years to businesses into commercial real estate or heavy machinery projects. The loan funds could amount to up to $5.5million.
A little brief about the CDC: A Certified Development Company is a nonprofit corporation approved and managed by the SBA. Its primary aim is to help develop its community by working with lenders to make funds available to small businesses. This is because they are aware of the community’s needs and challenges.
Structure of the SBA 504 Loans
In this program, three parties are responsible for covering the loan financing. The lender covers 50%, CDC covers 40%, and the borrower will cover 10%. But if the borrower defaults on the loan payment, the lender is paid first to reduce the risk on the lender’s side.
For businesses that are new in operation below 2years, their equity will be 15%, making it a structure of 50%, 35%, 15%. Also, suppose you’re running a new business together alongside a property for special purposes. In that case, your equity will be 20%, creating a structure of 50%, 30%, 20%.
Who Qualifies For This Loan?
If you’re a business owner, several factors will make your business qualify for this loan. These factors include:
- Your business should be above the early planning stage.
- Your business operations or possessions must be in the U.S.
- Your business should be running with an average net income of $5 million two years before the loan application and a net worth of less than $15 million.
- The business must meet the general SBA loan requirements and occupy 51% of the building space to run its operations.
What Can The Loan be Used For
This loan program is offered to small businesses for the specific purposes of developing the local community. Other purposes include:
- Purchase of equipment or machinery with a 10-year life span.
- Building new facilities or renovation of a building.
- Clearing up debts incurred from purchasing equipment.
- Improving the land.
- Land surveying and appraisal.
- Purchasing commercial real estate properties.
Terms and Interest Rates
The maturity terms depend on the particular loan you obtain. They’re available for 10years, 20years, and 25years, respectively. The interest rate for a 10year loan period will be 4.85%, and that of 20years will be 5.07%
Added to the terms of this loan, borrowers are eligible for 3months of loan forgiveness. However, the SBA will not give a fixed payment period for your loan, as they’ll be making your loan payments. Instead, you can relate with the CDC to agree on your repayment plan.
How Do You Get an SBA 504 Loans?
You’ll need to look out for a CDC that will help you with the application process. This nonprofit organization will organize your financing and present the loan package to the SBA for approval.
Moreover, you will need several documents to apply for this loan. The documents include:
- Your business plan.
- Three years of tax returns for your business.
- Your own tax returns for three years.
- Your financial and business financial statements for the last three years. Also, the building contractor estimates and cost documentation will be required.
The financial institution you work with and the CDC might request additional documents to be presented. Note that the SBA loan might take between 1-2 months to close when your application is approved.
SBA 504 Loan: Benefits and Drawbacks
Benefits of SBA 504 Loans
| Feature | Details |
|---|---|
| 90% Loan Financing | Offers up to 90% financing of the total project cost, more than the typical 85-90% by the SBA 7(a) loan ➔. |
| Broad Qualification | Accessible to most small businesses in the U.S., with resources and SBA’s partial guarantee. |
| Affordable Interest | Fixed interest rates provide financial predictability over a 10-20 year period. |
| Low Down Payments | Requires only a 10% down payment, much lower than the regular 25-40%. |
Drawbacks of SBA 504 Loans
| Feature | Details |
|---|---|
| Restricted Usage | Funds are limited to specific SBA-approved purposes, not for working capital. |
| Complex Process | Involves coordination among the borrower, lender, and CDC, with multiple terms and requirements. |
| Required Contribution | The 10% contribution by the business can be substantial, depending on the project’s total cost. |
| Job Creation | Businesses must create/maintain a job for every $65,000 received or meet a public goal, which can be demanding. |
Bottom-Line
The SBA 504 loans presents small businesses with finances to purchase, refinance a property or construct commercial properties. In turn, these projects could also provide job opportunities in the community.
If you’re a business owner looking for a loan to support your business with the purposes listed above, you can utilize this advantage.
