What Can the SBA 504 Loan Program Finance? Likely More than You Think
The SBA 504 loan program has been long known as a fixed-asset financing tool. Its favorable terms make owner-occupied real estate acquisition and expansion projects more affordable for many small businesses and provide bankers with a competitive advantage when working with small business customers.
When most lenders think of 504, they associate eligible expenses with fixed-asset projects. In reality, the 504 loan program goes far beyond real estate and equipment. In this brief article, we provide a snapshot of the full range of costs eligible for 504 funding, including soft costs and debt refinance.
Understanding fixed-asset projects: hard and soft costs
In addition to the traditional fixed asset project costs covered by a 504 program loan, which are primarily hard costs including real estate acquisition and equipment, funds can be used for a variety of additional soft costs that borrowers tend to incur with these kinds of projects.
These include costs such as architectural and engineering fees related to construction projects, costs for appraisals and environmental reports and even closing-related expenses, such as title insurance, surveys, permits and certain fees. Additionally, borrowers aren’t limited by how they apply the funds to the hard and soft costs, as long as they’re related to the funded project.
Takeaway: Think beyond fixed assets when it comes to 504 – many costs associated with the overall fixed-asset projects are eligible costs for the 504 program.
Refinancing options: The 504 program makes more expenses eligible
Now that the 504 program also allows for funds to be used for business debt refinance, it’s possible to finance an even broader variety of costs, including those that are not directly related to the fixed-asset project.
For example, with a 504 refinance, eligible costs can include credit card paydowns or payoffs and line-of-credit paydowns or payoffs, when the expenses were incurred for business purposes. The project funds can also be used for operating expenses like payroll, inventory, utilities and more, even if these expenses haven’t yet been incurred (as long as the borrower itemizes how the funds will be spent and uses the funds within 18 months of receiving the funding).
However, there’s one nuance to look out for: these expenses are eligible only if they’re in conjunction with the refinance of eligible mortgages. Eligible mortgages are typically those that have been in place for more than two years, have been current for at least one year, do not have existing federal agency guarantees (SBA or otherwise); and that were originally used for 504-eligible fixed assets.
With the 504 refinance option, borrowers have the opportunity to use equity held in fixed assets to restructure their company’s balance sheet and reduce higher-cost business debt. For the business owner, this results in more affordable and predictable monthly payments. For the banker, this provides an opportunity to mitigate risk and build relationships with a wider array of business customers.
Takeaway: If you have a small business client who needs to increase working capital or refinance debt, think 504. It’s a relatively new feature that’s currently underleveraged – so far this year (2019), only three percent of 504 approvals have been used for refinance projects.
504 Use of Funds Summary
At The 504 Company, it’s our job to understand the intricacies of the program. When you bring a fixed-asset project or a refinance to the table, we’ll work with you and your borrower individually to identify eligible costs and structure the best loan possible. While whether a cost is eligible for 504 can often be nuanced, this chart can provide a helpful snapshot when you’re in the early stages of working with a borrower.
Let The 504 Company make 504 lending easier for you and your clients
Every day, we partner with lenders who want to strengthen relationships with their clients and help them grow their businesses. In particular, the 504 loan program is beneficial when the businesses or projects wouldn’t otherwise qualify for conventional commercial loans or when borrowers would benefit from the advantageous terms the 504 program offers, including terms up to 25 years and fixed, competitive interest rates.
We help make the SBA loan process easier for lenders and borrowers, and we look forward to partnering with you to help your small business clients succeed!