Know These Facts About 504
The SBA 504 loan program is one of the most advantageous small business loan options around, offering small business owners low, fixed interest rates along with longer terms and lower down payments. At The 504 Company, we believe that more small businesses should be taking advantage of this program.
In this article, we assembled facts about the program that address five of the most common barriers we see when bankers are deciding whether a 504 is the right fit for a borrower. Read on to strengthen your ability to help your customers take advantage of all that the 504 program has to offer.
But first…what is the SBA 504 loan program?
At its core, the 504 loan program supports the role that small businesses play in economic development and job growth by making loans for owner-occupied commercial real estate, heavy equipment purchase, and/or debt refinance more accessible and affordable. Banks partner with Certified Development Companies (CDCs) like The 504 Company to offer 504 loans in tandem with conventional financing. The conventional mortgage is usually 50% of the project cost secured by a first mortgage/lien, and the 504 is usually 40% of the project cost secured by a second mortgage/lien. The borrower needs as little as a 10% equity contribution. If you’re new to 504, download our 504 fact sheet to learn more, or contact us for a walk-through of the program.
Common Perceived Barriers to 504 Financing:
1. The business lacks cash for the equity contribution
While the 504 loan program requires an owner-equity contribution, its often as low as 10%. And, sources aren’t limited to cash only. They can include a combination of cash (including gifts from friends and family), seller financing, economic development financing and existing equity value in owned property. Don’t let limited liquidity get in the way of 504 financing; most applicants find that they’re easily able to meet the equity requirement.
2. The bank and borrower need a fast, streamlined process
The 504 loan process is quicker and more streamlined than most anticipate, particularly when working with The 504 Company. As one of the largest 504 lenders in the country, we benefit from 3-5 day turnaround from the SBA. We also offer the option to start a loan application and submit required documents online, and our expert staff is always available to support bank partners and borrowers through the process.
In addition, the information needed for 504 loans is similar to the requirements for bank mortgages (which most borrowers already have on hand), and applications for bank-originated first-mortgage loans and 504 second mortgages occur simultaneously. For all these reasons, it’s not uncommon for 504 loans to be approved before the bank loan, making them a great option even when time is of the essence.
At first glance, the fees associated with 504 loans, which total about 3%, make them seem more costly than other types of business loans. However, when considering overall fees for total project financing, which includes fees from the third party lender, the percentage drops to around 1.5% Additionally, The 504 Company does not charge an origination fee (typically 1% for traditional mortgages). For properties located in New York, the 504 second mortgage is exempt from mortgage tax, which can save borrowers an additional 1% to 3%, potentially offsetting some or all fees.
We often coach our partners and borrowers to review the fees in the context of the benefits of the transaction. 504 fees are financed over the life of the loan, leaving borrowers with low upfront costs. 504 also allows businesses to lock in below market rates (current rates are always posted on our website) for the life of the loan, which can significantly reduce the total cost of capital. Many find that this benefit outweighs the fees. This is particularly important to the borrower and the lender in a rising rate environment.
4. The business is growing, strong, and “doesn’t need” 504
The SBA is a government agency designed to support small businesses. This designation has led many to believe that all of its programs cater to smaller, “weaker” businesses that require the government’s help. However, the 504 program is an economic development program targeting job creation (more on that below) that should not be overlooked by strong and growing businesses. A company’s strength and principal’s wealth are relative to the size of the project, which could make 504 more appropriate than one might ordinarily think.
The spirit of the 504 program is to allow better financing terms so that a business is able to expand more cost effectively. All businesses are encouraged to look into the program and contact a loan officer from The 504 Company to determine if there is a fit.
5. The business doesn’t meet job creation requirements
As mentioned above, the 504 program is intended to create and retain jobs. However, the SBA recognizes that not all projects result in new employees and there are public policy goals that allow the loan to proceed even if it’s anticipated that the number of jobs created will fall short of the requirement. For example, lending to woman-, minority- and veteran-owned businesses are public policy goals. Other goals include funding businesses in rural areas or in neighborhoods with a revitalization plan. Our lenders are skilled at placing businesses into the program, so please call us to discuss.
With generous loan amounts, low fixed-interest rates, reasonable fees, longer repayment terms, and flexible eligibility and owner-equity requirements, thousands of business owners have used 504 loans to grow their businesses beyond their plans—even beyond their dreams.
Will your customer be next? Contact The 504 Company if you are working with a borrower that could benefit from the 504 program. We’ll get to know the business and help determine if the 504 loan program is a fit.
About The 504 Company
The 504 Company is a nonprofit Certified Development Company that’s certified by the SBA and a leading provider of SBA 504 and Community Advantage loans in New Jersey, New York and Pennsylvania. Our ability to process applications fast and professionally makes us the go-to partner for SBA loans throughout the region.