Owning commercial property can be a pivotal step for small business owners, offering stability and the potential for significant growth. However, navigating the maze of commercial real estate financing can be daunting. This is where the Small Business Administration’s (SBA) 504 loan program comes into play, offering a lifeline to entrepreneurs aiming to purchase or refinance commercial properties. Here’s a comprehensive guide to understanding how the SBA 504 loan program works and the benefits it can bring to your business.

What is an SBA 504 Loan?

The SBA 504 loan program is designed to aid small businesses in acquiring or improving commercial real estate and other fixed assets. The SBA collaborates with Certified Development Companies (CDCs) and lenders through this program to provide small business owners with long-term, fixed-rate financing. This is mainly aimed at promoting economic growth within the community.

How Does an SBA 504 Loan Work?

An SBA 504 loan is typically structured with three parties: the borrower, a bank or a private sector lender, and a CDC. The breakdown of financing is as follows:

  • 50% from the bank/lender: This portion of the loan comes directly from a bank or another lending institution and holds a first lien on the asset. The loan must be at least 50% of the total project cost.
  • Up to 40% from the CDC: Financed through a 100% SBA-guaranteed debenture, this portion holds a second lien position and can cover up to 40% of the total project cost, with a cap of $5 million ($5.5 million for manufacturing projects or projects that meet certain energy efficiency goals).
  • 10% equity from the borrower: The business owner is required to contribute at least 10% of the project’s cost. This requirement ensures that the borrower is significantly invested in the project’s success.

Benefits of the SBA 504 Loan

1. Low Down Payment: The typical 10% down payment is significantly lower than what is required for traditional commercial loans, making it more accessible for small businesses.

2. Fixed Interest Rates: The 504 loan offers fixed interest rates on the CDC portion, providing businesses with predictable monthly payments and protection from future interest rate increases.

3. Long-Term Financing: Loan terms can extend up to 20 or 25 years for real estate and ten years for equipment, providing businesses with long-term stability and lower monthly payments.

4. Ownership Equity: By investing in commercial property, businesses can build equity over time, which can be beneficial for future financing needs or business expansion.

Eligibility and Use of an SBA 504 Loan

To qualify for an SBA 504 loan, a business must operate for profit in the United States, have a tangible net worth of less than $15 million, and have an average net income of less than $5 million after federal income taxes for the two years preceding the application. The financing obtained through this program can be used for:

  • Purchasing land and buildings
  • Constructing new buildings or renovating existing ones
  • Buying machinery and equipment with a service life of at least ten years
  • Refinancing debt in connection with an expansion of the business through new or renovated facilities or equipment

How to Apply for an SBA 504 Loan

Applying for an SBA 504 loan involves working with a CDC and a participating lender, such as EB Mortgage. The first step is to contact a CDC in your area, which will guide you through the application process, including the initial paperwork and gathering the necessary financial statements.

For small business owners looking to purchase or refinance commercial properties, the SBA 504 loan offers a compelling financing solution. With its low down payment requirement, fixed interest rates, and long-term financing, the 504 loan can provide the stability and resources needed to take your business to the next level. Consulting with a knowledgeable mortgage lender or broker who specializes in SBA loans can provide you with personalized guidance and help streamline the application process.

Interested in obtaining a SBA 504 Loan? Contact EB Mortgage for wholesale mortgage solutions.  

EB Mortgage is a locally owned mortgage company with experts in new home purchase, refinancing, and commercial loans. Our wholesale rates can’t be beaten. We offer more products, more options, and more solutions. Our “3C” Process is simple: complete our pre-approval request, consider options based on your requirements, and choose the offer that suits your needs best. Call us or e-mail us today! 

Written by the digital marketing team at Creative Programs & Systems: www.cpsmi.com

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