Minding Business

SBA 504 Loans Can Help You When It's Time to Build or Build Out


Posted: June 25, 2019 by Anna Jotham

Are SBA 504 loans right for your project?

As a business or commercial property owner, securing financing to build or build out is no small matter. It’s good to know that SBA 504 loans can provide the financial support small businesses need. But what are SBA 504 loans, and how can they help you?

 

What are SBA 504 Loans?

SBA 504 loans are loans guaranteed by the United States Small Business Administration. The 504 loan allows small businesses to utilize fixed-rate financing, long-term, for an average of 10-20 years. For small business owners, the low interest rates and low down payment required (10?5%, about half of what banks typically require for a conventional loan) are particularly beneficial.

 

What are the requirements for SBA 504 Loan eligibility?

SBA 504 loans can be a good choice for borrowers who have good credit with a score of 650 or more and for renovation projects that will cost more than $500,000. The property itself must be owner-occupied, and the renovation must create or retain jobs or promote other public policy goals for a borrower to be eligible. Why? The SBA wants to support businesses that contribute to the economy—so you’ll be asked about the number of jobs you can create or retain with the loan. Unfortunately, this requirement frequently trips up would-be borrowers.

If the project does not satisfy the jobs requirement, a potential borrower may be eligible if they meet another public policy goal, such as stabilizing the local economy, stimulating business development, revitalizing a business district, aiding rural development and more.

If the criteria are met, eligible borrowers could access as much as $20 million for renovations or upgrades to existing facilities in addition to the purchase of real estate or equipment.

 

Understanding how an SBA 504 Loan works

SBA 504 loans have three parts: a bank loan, a loan from an SBA approved certified development company (CDC), and the down payment the borrower can put up. The CDC part of the loan can reach up to $5 million or $5.5 million for green energy companies. The bank’s portion of the loan can double or triple that amount.

It’s important to know that with the requirements of an SBA 504 loan, it may not be easy to qualify. Most SBA 504 loans go to established businesses and borrowers with good credit. Startups may qualify but will have to prove they have strong financials and an excellent personal credit history. A personal bankruptcy or other red flag could take a borrower out of consideration, as could existing debt.

 

SBA 504 loans: low interest rates and long-term financing for eligible borrowers

SBA 504 interest rates are typically less than a borrower would be able to secure with a standard bank loan, so for eligible borrowers they can be an attractive option. Be sure to ask whether loan rates quoted to you include the associated fees, including the CDC fee, the SBA Guarantee Fee, and the Annual Servicing Fee. That way, you’ll have a clear picture of the terms of the loan and whether it’s the right choice for your build or build out.

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