The Benefits of the SBA 504 Loan Program: Fixed Interest Rates and More
When your small business clients explore loan options to purchase owner-occupied commercial real estate or refinance debt, chances are they’ll look for loans with favorable repayment terms, interest rates and down-payment requirements.
As the Federal Reserve Board continues to raise interest rates, fixed-rate financing options are even more important for small business owners. Through the U.S. Small Business Administration’s 504 Loan Program, borrowers can achieve more, with exceptional interest rates and lower monthly payments over longer terms, leaving businesses with more money on-hand each month.
A major benefit of the 504 loan program is the affordable interest rate that’s fixed for the life of the loan. While many borrowers have grown accustomed to the low interest rates of the last decade, these rates aren’t going to last.
When looking at conventional commercial real estate financing options, it’s important for borrowers to know that most mortgages only offer fixed interest rates for the first three to five years of their terms. After that, interest-rate adjustments can vary and fluctuate with the market, which can increase the business owner’s monthly payments and potentially put them at risk of financial distress in a rising interest rate environment.
With SBA-backed 504 loans, your clients benefit from a fixed interest rate for the entire term of their loan. And this same great rate is available to all qualified purchases or refinances, making it an excellent rate for any borrower.
In addition to a fixed rate, the SBA 504 loan program comes with many other benefits that are a hallmark of the program:
1. Lower and more flexible down payment options
While conventional commercial loans typically require a down payment of at least 20%, many 504 loans require down payments as low as 10% (some are slightly higher). Importantly, the 504 program enables borrowers to use a variety of sources for their down payments, from grants and gifts, to seller financing and more, meaning that most borrowers have more available equity to put toward down payments than they may realize.
2. Repayment terms up to 25 years
Lengthening the number of months or years over which loans are repaid means that monthly payments are lower, and with the 504 program the differences are significant. While most conventional commercial real estate loans offer 10-year terms (with 20-year amortizations), 504 loans offer terms up to 25 years. Because the lower payments are easier on borrowers, it also means that lenders are more likely to experience successful loan repayments on their loans too.
3. They can be used for purchases and refinances
In addition to real estate acquisitions and improvements, these loans can be used to refinance existing commercial mortgages and help reduce higher-rate debt by cashing out up to 20% of the value of the underlying asset to use toward operating expenses or to pay down outstanding bills or credit cards.
4. The loans are assumable when businesses are sold
If a client decides to sell their business, the 504 loan can be assumable by creditworthy buyers. With the option to benefit from today’s low rates years down the line, a 504 loan today may make potential business purchases even more attractive to prospective buyers in the future.
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“Whether buying a manufacturing plant or starting a miniature-golf business, the 504 loan program is often the best option for financing,” explains Jim Conroy, Regional President for Pennsylvania and Upstate New York for The 504 Company. “We see many borrowers who are able to take their businesses further because the program provided a monthly payment predictable over the life of the loan. In addition to a longer term and lower interest rate, remember the importance of a fixed rate as we enter a rising rate environment.” To learn more about the 504 program, including more benefits for lenders and small business owners, as well as the fundamentals of borrower and project eligibility, contact The 504 Company today.