What Are The Drawbacks Of The Sba 504 Loan Program
While there are plenty of benefits that make a 504 loan appealing, there are a few drawbacks that you should know about prior to deciding on a funding solution. Note that these drawbacks apply to all SBA real estate loans, not just the 504 program.
Application Process: The 504 program is not the most streamlined in the world, largely due to the need to have three parties involved. Its not just you working with a lender, as it would be with a conventional loan. Both the CDC and the lender must agree on terms, and ensure that they are in compliance with SBA requirements.
Underwriting: All SBA 504 loan underwriting goes through a single office. As you can imagine, that sometimes leads to bottlenecks. However, the underwriters are also exceptionally thorough and will question anything that seems out of the norm, or that needs further clarification. The more questions or concerns the underwriter has, the more involved the lender, CDC, and you must be in the process.
Time: It should be noted from the outset that SBA real estate loans are not fast. In contrast to a home mortgage loan, which might close in just 30 days, it often takes around 60 to 75 days to close on an SBA real estate loan and receive your funding.
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How Can You Apply For A Sba 504 Loan
Did you know that there are over 200 CDCs operating in the United States? If youre unsure if your business meets the SBAs eligibility requirements, you can ask local CDCs for a quick discussion to find out.
We suggest bringing bank statements that prove you can repay your loan and swiftly put down a payment. In addition, you must know your businesss credit score and should provide other financial documents that will be useful to the lender.
Most likely, youll also need to submit a statement that explains how you plan to use the loan to create or retain jobs and how youll support the SBAs public policy goals. For every $65,000 loaned to your business, you must hire or retain one job. For small manufacturers, one job must be created for retained for every $100,000 loaned.
Check out this comprehensive checklist made by the SBA before you complete your CDC/504 Loan application.
The Big Piece Of The Puzzle:
The 50% portion of the SBA 504 Project will need to be provided by a Third Party Lender. This could by your bank, which you have a deposit relationship with, a non-depository lender, or a new lender with a local market presence in the area where you are making your investment. The terms and rate of your TPL loan are negotiable between you and that lender. The SBA does impose some restrictions on the TPL, but those Six TPL Restrictions are to protect the borrower.
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Whats A Common Situation Where An Sba 504 Loan Is The Better Choice
When there are multiple partners and one partner has more assets and equity in their home than the other, an SBA 504 loan may be the best option.
Again, an SBA 504 loan does not take a lien on any outside collateral or a home whereas a 7A loan does. If a 7a loan is used in this scenario, it becomes unfair to the more asset-rich partner.
Fees on 7a loans tend to rise with the project size. For example, the guarantee fee for a loan over $700,000 is 3.5 percent for a project up to $1 million. When the project exceeds $1 million, the rate jumps to 3.75 percent.
However, with the 504 loan, the fees involved stay flat as a percentage whenever the loan amount increases. On a $1.25 million commercial real estate project, the fees for a 7a loan can top $27,891, while the fees for a 504 loan are just over $13,306.
Also, the down payment required for the $1.25 million 7a loan would be $187,500 while the down payment for the SBA 504 loan would be $125,000. In this scenario, thered be a $77,085 out-of-pocket savings to the borrower if the property was financed with a 504 loan.
Do You Qualify Borrower Requirements For Sba 504 Loans
To be eligible for an SBA 504 Loan, there are strict requirements a business must meet:
- Borrowers must first meet the SBA size requirements
- Businesses must have a tangible net worth less than $15 million.
- You must also have an average net income less than $5 million the two previous years before applying.
- Businesses must be for-profit
- Businesses must be owned by U.S. citizensor resident aliens with permanent resident status.
For businesses wishing to gain financing for projects involving real estate, the business must occupy a minimum of 51% of rentable property for existing structures. Businesses intending to build a space must intend to occupy at least 60% of rentable property, with the intention of occupying 80% with growth.
As the 504 Loan is intended to directly create jobs, borrowers must also meet the job creation and retention requirement. This requires the business to create one job per $65,000 received in SBA financing. If the borrower is a small manufacturer, they must create one job per $100,000 borrowed.
If your business engages in other credible community goals, the job creation requirement can be waived. Such initiatives include community development goals, public policy goals, or modernizing facilities for health, safety, or environmental reasons.
There is no minimum required, although it is best that you know ahead of time whether you can afford a small business loan.
The Cdc/504 Loan Application Process
Businesses applying for a 504 Loan should be prepared to provide evidence of eligibility, indebtedness, and creditworthiness. The 504 Loan application is roughly thirteen pages long and requires information on project cost, energy efficiency goals, debenture pricing, etc. Once the application is completed, it should be submitted to the CDC, which will then forward the information to the SBA Loan Processing Center.
Video: The Benefits Of The Sba 504 Loan Program
The program can be used to purchase owner-occupied commercial real estate, fixed assets, and to refinance eligible business debt. Its a great option for business owners because it offers:
- A low down-payment for the borrower
- Fixed interest rates, and
- Longer repayment terms
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What Is An Sba 504 Loan
SBA 504 loans offer long-term financing for major business purchases like real estate or machinery. Loans are typically capped at $5 million, but some projects can qualify for up to $5.5 million.
Funding for each 504 loan comes from three places:
A Certified Development Company .
A bank or credit union .
The small-business owner taking out the loan . Under certain circumstances, business owners may need to put down as much as 20%.
SBA 504 loan rates, fees and repayment terms:
Term length: 10, 20 or 25 years, depending on the loan.
Interest rates: Rates are tied to the five- and 10-year U.S. Treasury notes and are typically around 3% of the amount financed.
Fees: The SBA is temporarily waiving fees for lenders and borrowers as part of its coronavirus relief efforts. Under normal circumstances, fees typically include SBA, CDC and bank or credit union fees, which vary. These fees are baked into the total loan amount, so a business owners only upfront cost is the 10% down payment.
Commercial Real Estate Loans Machinery & Equipment Loans Green Loans Debt Refinancing Up To 90% Fixed Interest Rate Financing
The Small Business Administration 504 Loan Program available through Florida First Capital/First Capital Finance provides affordable long-term capital for the purchase of capital assets, such as owner-occupied commercial real estate, energy efficient green projects and/or heavy duty machinery and equipment, without the high down payment requirements often associated with conventional financing programs. Borrowers can also get relief from high-interest commercial mortgage debt under the SBAs 504 Debt Refinancing Program.
Loan Structure & Down Payment Schedule
The 504 Loan Program is a partnership program between Florida First Capital/First Capital Finance a nonprofit SBA licensed and regulated Certified Development Company and a commercial lender. Working with participating lenders, Florida First Capital/First Capital Finance provides up to 90% financing at below-market, fixed interest rates and long amortization terms for eligible fixed asset purchases.
Typically, a commercial lender provides financing for 50% of the 504 loan project and takes a first lien position Florida First Capital/First Capital Finance/SBA provides 40% of the project financing and takes a second lien position and the borrower provides a down payment of just 10%. There is no limit on overall project size. If a project is a start-up business or a special purpose facility, the borrowers down payment increases to 15%.
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The borrowers contribution doesnt have to be all in cash. Equity in land previously acquired or equity in land and buildings that will be part of the project may be part of their contribution if, for example, the business is adding a new building to the same property.
What is a debenture? A debenture is an obligation issued by a CDC and guaranteed 100% by SBA, the proceeds of which are used to fund a 504 loan. In other words, its the funding mechanism for the SBA/CDC portion of the loan.
What Happens After Your Loan Closes
To enable CDCs to raise funds that can be loaned to other small businesses, when an SBA 504 loan closes, the debenture can be sold on whats called a secondary market. When that happens, its normally seamless for you. Youll still make payments to your CDC as agreed when your loan closed. Additionally, depending on your loan amount, you may receive a refund of up to $2,500 after the debenture is sold.
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Sba 504 Loan Rates And Terms
When you get an SBA 504 loan, you can expect to save on costs. Unlike other SBA loans, the SBA 504 loan program offers lower up-front fees and fixed interest rates, a huge bonus given the recent trend of rising interest rates. Currently, SBA 504 loan interest rates are 4.66% for a 20-year loan and 4.49% for a 10-year loan. Those are some stellar rates.
But your credit score can impact your rate. The higher your score, the lower the rate. SBA 504 loans are amortized over 20 years, with no balloon payment. So you dont need to worry about a massive final payment. Unfortunately, theres a prepayment penalty on the 504 loan for the first half of the loan term.
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Benefits Of A 504 Loan
- Lower down payment
- Longer terms and amortizations
- Low, fixed interest rate
- Reduces Lender’s risk = better terms for the borrower
- Flexible structure: seller note for down payment
- Finance real estate and furniture and equipment into one loan
- Finance soft costs and fees
Here are some examples of businesses that we have financed:
What Is The 504 Sba Loan Program
The 504 SBA loan program is a loan program that is designed to help small businesses grow and expand. Here are the basics of the 504 SBA loan program and how it works.
504 SBA Loans
With this type of loan, businesses can use the funds that they receive to expand their current business. They could potentially use the money to buy new equipment, purchase additional land, or expand their building. Anything that has to do with expanding the business could be covered with the funds from this type of loan.
In order to qualify for this loan, your business is going to have to meet the requirements that are set forth by the SBA. This means that your business is going to have to fall into certain size limits depending on the industry in which you are in. If you are too big, your business is not going to be able to qualify.
Getting this type of loan is going to allow you to get a very competitive interest rate. Another benefit of the 504 SBA loan program is that you will be able to be approved easier because the SBA is going to be standing behind the loan.
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What Are The Requirements For Going Green With A 504 Loan
Interested in going green using a 504 loan? There are a few qualifications that your business and your project will need to meet first. Note that your project may only need to meet one of these qualifications. These are as follows:
Project goal is to design/build LEED certified buildings
Project goal is to reduce energy consumption by 10% or more
Project goal is to create renewable energy
Project goal is to incorporate sustainable design element
What Is A 504 Loan
A 504 loan is a second mortgage thats made in addition to a first mortgage loan through your bank. The 504 portion will be administered by a Certifed Development Company , like Pursuit, who is certified and regulated by the SBA.
Though the program includes two mortgages, the time to funding is about the same as using a bank-only loan, and theres significant savings for you as the business owner.
For a typical 504 project, your bank will provide 50% of the financing, the CDC will provide 40%, and youll need to put as little as 10% down.
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If you rent your business location and are using the 504 loan to acquire fixed assets, keep in mind that an assignment of lease and Landlords Waiver must be obtained either when a substantial portion of the loan proceeds are to be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased land or premises. The waiver may be a stumbling block to getting one of these loans.
Missed out on PPP & EIDL? Nav can connect you with small business loans right for your business.
The loans themselves work like property loans, and a down payment is generally required. Unlike longer mortgages, however, which can be repaid in 30 years, the SBA loan terms for the 504 program are between 10 and 20 years. You can imagine that makes for some pretty large payments!
Can a borrower use the 504 proceeds as a disaster loan? A qualified purchase of real estate or fixed assets may be a good fit for the 504 program, but dont discount loans given to those in qualified disaster areas. These loans are often easier to qualify for and have more generous loan terms.
A Primer On Sba 504 Loan Programs
A range of lending institutions in the U.S. offer varied funding and capital solutions for small businesses. And those loans range in size from small and quickly repaid amounts to larger and more complexly structured loans. In 2018, the Small Business Association averaged $107,000 per loan to small businesses. With small businesses creating 60% of all new jobs, its money well invested. Of the many options, and their range of benefits, which is right for your small business? This article is going to give you an overview of one funding option in particular: the SBA 504 loan program.
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Can You Clear Up Any Top Misconceptions About An Sba 504 Program
Borrowers tend to think 504 loans are more complicated and harder to qualify for compared to 7a loans. Also, they often view the 504 loan prepayment penalty as onerous.
Those are all misconceptions. First, the lending process for a 504 loan is similar to that of a bank loan. And it may actually take longer for a 7a applicant to be approved since outside collateral is required by the program. Thats not required from 504 borrowers.
Lastly, the prepayment penalty for 504 loans is less expensive than the 7a in fees and the prepayment amount. The exception: when the 504 borrower prepays in a years time.
Can You Use A 7a Loan To Buy Commercial Real Estate
Yes, this is possible.
However, the 7a option would be more expensive as it relates to the SBA guarantee and SBA fees.
Also, banks are not supposed to finance those fees with the loan proceeds, so there is a much more expensive up-front cost with 7a loans.
Heres a hypothetical situation:
For projects where the property price combined with tenant improvement exceeds $775,000 the dollar-cost difference is dramatic.
In this case, the fee for the 504 loan would be 1.2 percent of the total loan compared to 2.9 percent for the 7a loan.
Whats more, if the 7a loan is financed at 90 percent loan to value , there is usually a lien on the home, the business , or both.
SBA 504 loans do not require any liens on personal residences.