SBA 504 Loans
504 Loans:
The SBA 504 loan program provides long-term, fixed-rate financing for small businesses to acquire significant fixed assets for expansion or modernization. These SBA loans can be instrumental in helping small and medium-sized businesses grow by financing the purchase of real estate, construction of new facilities, renovations, purchase of heavy equipment, and other fixed assets.
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Overview of SBA 504 Loans
SBA 504 loans are administered by Certified Development Companies (CDCs), nonprofit corporations promoting economic development within their communities. CDCs partner with SBA lenders to provide financing to small businesses.
Here’s how it works:
- Up to 50% of the project costs are financed through a loan from a CDC. This loan is backed by a 100% SBA-guaranteed debenture.
- Up to 40% is provided by a third-party lender such as a bank or credit union. This loan is secured by a senior lien against the project assets.
- At least 10% comes from the borrower as a down payment.
Some key benefits of an SBA 504 loan include:
- Long-term fixed interest rates – Interest rates on the CDC/SBA portion are fixed for the entire term, which can be 10 or 25 years. This provides payment stability.
- Low down payments – In most cases, only 10% down is required, freeing up capital.
- Flexible usage – Can finance up to 90% of the total cost of purchasing real estate, improving existing facilities, or purchasing heavy equipment.
- Higher loan amounts – SBA 504 loans can go up to $5 million for regular loans and $5.5 million for manufacturing loans. With a maximum SBA debenture of $5 million, projects up to $12.5 million can be financed.
SBA 504 Loan Uses
SBA 504 loans can be used to finance fixed assets that help a business expand. Here are some of the most common uses:
Purchasing Commercial Real Estate
One of the primary uses of an SBA 504 loan is for purchasing owner-occupied commercial real estate. This includes land and existing facilities, as well as ground-up construction costs.
Acquiring commercial property for a business has many benefits beyond securing a location. As the property appreciates, it builds equity over time, and mortgage interest and taxes are tax deductible. With a 25-year SBA 504 loan, the fixed interest rate stabilizes occupancy costs over the long term.
With stable financing, small businesses can build the facilities they need for current and future operations. This includes industrial warehouses, office buildings, retail space, specialized production facilities, and other commercial buildings.
Renovating or Expanding Existing Facilities
Small businesses often start in a small space and then expand as they grow. An SBA 504 loan makes renovating and expanding an existing property easy.
Up to 50% of the funds can go towards renovations like installing energy-efficient lighting and HVAC systems, adding more space, or making structural changes to improve material handling. Expanding and customizing a space for maximum efficiency is an excellent use of SBA 504 financing.
Purchasing Heavy Equipment
Some businesses rely on expensive heavy equipment and machinery for their operations. This includes transportation equipment, farm equipment, construction equipment, high-tech manufacturing equipment, and more.
SBA 504 loans make getting the essential equipment a growing business needs easy. Since the loans are structured with long repayment periods and fixed interest rates, the monthly payments are manageable even when financing expensive equipment.
Other Fixed Asset Expenses
In addition to the significant uses above, an SBA 504 loan can be used flexibly to finance other fixed asset expenses. This includes costs like infrastructure development, upgrading utilities, making solar improvements, and more.
Businesses can expand operations more seamlessly by financing these fixed assets as part of a commercial real estate project or equipment purchase. Long-term loans make it easy to spread out repayment over time.
Benefits of SBA 504 Loans
An SBA 504 loan offers many advantages, making it an attractive option for financing major fixed-asset purchases and expansion projects. Here are some of the top benefits:
Fixed Low-Interest Rates
The interest rate on the SBA 504 loan portion from the CDC is fixed for the entire term. This rate stability helps small businesses manage their long-term occupancy costs.
Fixing the interest rate creates no uncertainty as rates rise in the broader economy. Business owners gain peace of mind knowing their principal and interest payments will remain the same each month.
Lower Down Payments
SBA 504 loans require only 10% down from the borrower. This helps conserve capital compared to conventional business loans that require 20-30% down.
It can be challenging for small and medium-sized businesses to tie up cash as a down payment. The low 10% requirement makes SBA 504 loans more attainable. The remaining 90% of the project costs can come from the 504 loan and a third-party loan.
Long Repayment Terms
SBA 504 loans have terms of up to 25 years for real estate and significant renovations. For equipment purchases, terms can go up to 20 years.
These lengthy repayment terms keep monthly payments low and affordable. The longer terms allow businesses to stretch out the financing and better match loan repayment to the useful life of the assets.
Potential to Refinance / Lower Interest Rates
Under the new rule, variable 7(a) loans can be refinanced into fixed-rate SBA 504 loans. Borrowers can lower their interest rates by refinancing, enabling them to take advantage of any rate declines.
Financing for Healthier Buildings / Energy Efficiency
SBA 504 loans incentivize energy-efficient upgrades that reduce a building’s environmental impact. These projects are eligible for slightly higher maximum loan amounts.
For example, with a regular 504 loan, the maximum is $5 million. But the limit goes up to $5.5 million for projects certified as green buildings. This extra financing can help small businesses implement energy and water efficiency improvements.
Community Focused Lending
The CDCs that issue the 504 loans are nonprofits focused on economic development in their local communities. When a small business uses a 504 loan, it partners with an organization invested in their region’s growth.
This also creates a multiplier effect where the expansion projects help increase jobs and opportunities. The SBA estimates that each 504 project creates two additional jobs per $100,000 borrowed.
SBA 504 Loan Application Process
Applying for an SBA 504 loan involves working with an SBA-approved lender, like Sunwest Bank, and Certified Development Company (CDC) in your region.
- Find a lender – Consult with SBA-approved lenders like Sunwest Bank to discuss your expansion goals and see if a 504 loan is a good fit based on the use of funds.
- Select a CDC – Research CDCs local to your area and select one to partner with. The CDC issues the debenture that provides up to 50% financing.
- Submit application – Work with your lender and CDC to complete the 504 application, including your business plan and financial projections.
- SBA approval – The SBA will review the application and give final approval for the government guaranteed debenture.
- Close loan – After approval, you’ll finalize loan documents with the lender and CDC. The debenture sale funds the CDC portion, while the lender provides the third-party loan.
- Loan funding – Once the debenture is sold, loan funds are disbursed, and you can begin your expansion project.
It typically takes 2-3 months from application submission to funding. The process involves quite a bit of paperwork, so give yourself ample time, especially if your request is over $2 million.
Partnering With a Trusted SBA 504 Lender
The SBA 504 loan process can be complex, but working with an experienced lender simplifies it. Reputable lenders like Sunwest Bank have SBA experts on staff to guide you through every step.
We’ll help prepare financial documents, determine the optimal loan amount and structure, coordinate with the CDC, and ensure your application highlights your company’s strengths.
Our team has closed hundreds of SBA loans over decades in business and knows how to navigate the process efficiently. We’re here to make accessing these powerful growth financing tools as seamless as possible for your small business.
Use SBA 504 Loans to Grow Your Business
For small and medium-sized businesses looking to expand through significant capital expenditures, SBA 504 loans are a game changer. The structured financing from CDCs coupled with conventional lender participation provides the capital to:
- Purchase owner-occupied commercial real estate
- Construct new facilities
- Renovate and expand existing buildings
- Acquire heavy equipment and other fixed assets
These loans increase cash flow by keeping down payments low and spreading repayment over 10 or 25 years at fixed interest rates. Business owners can expand their capabilities and capacity while building equity and wealth.
Sunwest Bank has extensive experience helping entrepreneurs maximize the benefits of SBA 504 lending. Let us help you chart an expansion course, acquire the needed assets, and grow confidently into the future. The 504 loan program can unlock your business’s full potential.