Small Business Administration (SBA) 504 Loan Program: What is it and how do small businesses benefit?

What is the SBA 504 Loan Program?

The Small Business Administration (SBA) is an independent organization of the U.S. Government that helps small businesses and entrepreneurs. The SBA 504 program is intended to provide long-term, fixed rate financing for major assets that promote job creation and business development. This program helps small businesses get funding by setting guidelines for loans and reducing lender risk.

How does the SBA 504 Loan Program work?

A business obtains its first mortgage from a bank 50% of the appraised value, secured by a first lien. This business would also obtain a second mortgage from an SBA 504 provider at up to 40%. Said business would, in return, contribute at least 10% of its equity, despite the threshold being 15% for startups and single purpose facilities.

How does a business qualify for this program?

In a recent interview, Brian Brady Vice President of Capital Markets at Matthews™ said, “SBA loans are full recourse to the business owner(s) purchasing property.” He stated that most underwriters for the program would prefer businesses that have been established for at least five years and been profitable for three of those five years. “Businesses expanding or replacing rent are excellent candidates,” says Brian. If the real estate is the primary asset, then SBA 504 loans are recommended for that business.

In order to get approval for SBA financing, the process typically takes about 60-90 days, that is if the borrower is well prepared.

Why should businesses apply for this program?

The SBA 504 Loan Program offers up to 90% financing, which is significantly higher than conventional loans.  SBA 504 loans are sometimes used by Matthews™ clients when purchasing owner-user properties like: hotels, gas stations, truck stop plazas, convenience stores, car washes, offices, and industrial properties. These loans can also provide ground-up construction financing for these asset classes as well.

The SBA 504 Program offers advantages for both borrowers and lenders.

Some borrowers’ benefits include:

• Low down payment (10% in most cases)
• Low, fixed interest rates with longer terms
• Up to $5 million for SBA portion of the loan, no limit on overall project size
• Preserves working capital