Loans backed by the Small Business Administration (SBA), such as the SBA 504 Loan, are the best deals in small business lending. There are features of the 504 Loan that cannot be found in alternative financing options. Those benefits however, are often overlooked or even unbeknownst to small business owners.

For those not familiar, the 504 Loan is an affordable loan option created by the SBA to support and encourage small business growth and in turn, improve our economies. The loan allows small business owners to purchase fixed assets, such as a building or equipment for their business, with a low down payment and a below-market fixed interest rate.

The 504 Loan consists of three parts, a conventional bank, a Certified Development Company (CDC), and the small business owner/borrower. There is a first mortgage from the conventional bank that supplies 50 percent of the total project cost, a second mortgage from the CDC/SBA that provides 40 percent of the total project cost, and down payment of at least 10 percent from the borrower. This unique structure is what allows the loan to be accessible to so many business owners. Banks are more likely to loan money when the loan is backed by the SBA.

50%: Conventional Lender
40%: CDC
10%: Borrower

The 504 Loan is the most affordable option for small business owners yet oftentimes, borrowers go straight to a conventional bank thinking that is the only or easiest way. Applying for an SBA loan may require a few more steps than a conventional loan however it saves small business owners the most money. Here is why applying for an SBA 504 loan is worth it:

1 – Low down payment

The low 10 percent down payment is one of the biggest attractions of the 504 Loan Program. Conventional loans often require a 20-40 percent down payment, an unattainable figure for many business owners. The low down payment opens the doors for many small business owners to purchase a building that otherwise couldn’t afford it. Certain circumstances require a down payment of 15 percent, such as when the loan is being used to purchase a special use property or if the business has been in operation for less than two years. However, this is still significantly less than conventional financing.

With the 504 loan’s low injection, businesses retain precious working capital. Renovations and soft costs can also be financed, allowing further cash savings.

2 – Below-market, FIXED interest rate

The SBA second mortgage is a fixed rate tied to the 10-year Treasury, unaffected by market instability or inflation expectations. The rate is consistently low and stable, being under 6 percent for the past 10 years. Today, that rate is 4.3 percent fixed for 25 years.

3 – Long term

The 504 rate has loan options of 10-years, 20-years, and 25-years. It is fully amortized through the life of the loan, meaning there is no balloon payment at the end of the term. This long term, below market rate provides small business owners with affordable monthly payments and enables them to control their overhead costs for the long term.

4 – Wide scope of uses

The 504 loan is widely known as the commercial real estate loan, however it can be used for much more. Funds from a 504 loan can be used for:

Acquisition of real estate (land and buildings)
Acquisition of equipment
Construction and renovation costs
Soft costs
Refinance conventional loans

There is no limit to the total project cost with a 504 Loan. The SBA portion (40 percent of the total project cost) is capped at $5,000,000 or $5,500,000 for manufacturing projects or projects that implement green efficiencies.

5 – Serves most property types, including special purpose properties

The 504 Loan is well-suited for properties classified as special purpose, such as wineries, car washes, bowling alleys, auto repair shops, gas stations, hotels, assisted living facilities, and fitness facilities. While the SBA provides better leverage and more favorable terms for all property types, it is especially attractive for properties classified as special purpose due to the more restrictive conventional financing available.

6 – Accessible to most small business owners

The SBA’s definition of “small” is substantially larger than what most people assume. The truth is, most for-profit businesses are eligible for 504 financing. The business must occupy at least 51% of the building on real estate purchases. This requirement ensures the integrity of the program aimed to help small businesses, not large investment companies.

7 – It may be the only affordable option

Many small business owners turn to the SBA when conventional banks say no or offer terms they cannot afford. In particular, businesses such as startups or those within specialized industries, have difficulty securing a conventional loan. With a 504 loan, the partnership with a CDC lowers the bank risk and increases a business owner’s chances of securing a loan with them. CDCs have longstanding relationships with all types of lenders and can help find the best bank to accommodate the first mortgage.

8 – Streamlined application process

There are also many misconceptions about how long it will take to get SBA financing and how much paperwork is required. The CDC can prequalify potential borrowers in 24 to 48 hours. Then they are approved by SBA in approximately seven days. The documentation for the 504 application is generally the same as the documentation required by first lender and the CDC underwrites the loan simultaneously with the lender.

9 – Favorable Repayment Options

504 loans can be repaid early and under very favorable conditions, sometimes with no penalty. Being a unique program, the 504 has unique prepayment conditions as well. After the first half of the loan term has passed, the loan can be repaid early at no additional cost. That is, a 20-year loan can be repaid without penalty in the 11th year or later, and a ten-year loan can similarly be repaid without penalty after five years.

For the first half of the loan, the penalty is the debenture rate (typically under 3 percent) on the balance of the loan. That penalty is reduced by 10 percent each year, reaching zero at the term’s halfway point.

10 – Support from a Certified Development Company

CDC is a nonprofit corporation built to support economic development within its community through the 504 Loan Program. CDCs are regulated by the SBA and strive to be the borrower’s advocate throughout the life of the loan. CDCs complete the paperwork and guide the borrower through the entire loan process. The CDC not only helps get the loan funded, but they will also be your partner for the next 10 to 25 years while servicing your loan.

A CDC is a great resource and source of advice for small business owners. To provide you with leverage when working on acquiring a building, a CDC can offer free consultations or a prequalification under no obligation or fee. A prequalification letter can give you an advantage when shopping for a building to purchase.

Are you Eligible?

As mentioned, most for-profit companies in the U.S. are eligible for the 504 Loan Program. There are 270 CDCs nationwide – research the best CDC in your community and contact them to see if you are eligible for the 504 Loan Program. TMC Financing is the number one CDC in California and Nevada and would be happy to provide a free consultation and prequalifaction to interested small business owners. During the past 38 years, TMC has provided over $9 billion in financing for more than 5,000 businesses. If you would like to learn more about the 504 loan, contact a TMC 504 loan expert today.