Interest rates have been at astronomically low levels for quite some time now. This has been advantageous for homeowners, investors, and businesses. The media primarily reports on Consumer rates; however, today we’ll be discussing one program that is designed for Businesses. The program we’re about to discuss was established as part of the Small Business Investment Act of 1958 for the purpose of promoting the development of businesses. Coincidentally, this is the same year that NASA was created. Let’s take a flight up into the business lending atmosphere!
The 504 loan program is one of the U.S. Small Business Administration’s (SBA) most well-known and widely accessed small business loan support initiatives, yet many small business owners aren’t familiar with the program’s benefits and how it works. The program saw a record-setting year in 2021 with nearly 10,000 loans approved nationwide. Small business owners should learn about this growing and highly beneficial program.
The 504 Program brings together the SBA, a Certified Development Company (CDC), a third-party lender (TPL), and the borrower. The CDC facilitates the 504 loan in collaboration with the TPL. Examples of TPLs include banks, credit unions, and community development financial institutions.
There 504 loan program is comprised of two separate loans, one with the TPL and one with the SBA. Terms and interest rates of the TPL loan vary and depend on the specifics of the transaction. The SBA portion of the financing, called a debenture, has terms of 10, 20, or 25 years at fixed rates typically more favorable than market rates.
Most commonly used to purchase, build, renovate, or expand owner-occupied commercial real estate, a 504 loan can also be used for heavy equipment and machinery, as well as other types of fixed assets. The loan is increasingly popular as an option to refinance commercial mortgages thanks to recently enacted legislation that provides more flexibility to small businesses.
Key advantages of the 504 Program include low down payment requirements and favorable terms. For most 504 loans, the borrower is required to contribute 10%, which can be either a cash down payment or existing equity depending on the loan purpose. A larger contribution might be required for certain types of properties and less established businesses with less than 2 years of operations; however, this is usually limited to 20%. Rates and terms are additional reasons small businesses benefit from the 504 program. The SBA portion of a 504 loan is fully amortizing at terms up to 25 years, meaning there are no balloon payments or early maturities. And with fixed interest rates for the full life of the loan, small business owners enjoy predictable loan payments. SBA 504 effective interest rates have remained below the prime rate since 2018 which leads to pricing typically below that of conventional financing.
Under the SBA 504 Refinance program, small businesses can refinance existing commercial mortgages and other qualified debts into a 504 loan to take advantage of the program’s favorable rates and terms. In many cases, businesses may also pull cash out to cover eligible operating expenses like salaries, utilities, inventory, and short-term debt.
Let’s take a look at how the 504 Program has helped one local business. A family-owned restaurant in Albuquerque had been leasing their building for several years but when the landlord raised rents and wouldn’t make certain repairs to the building, the owners decided it was time to buy their own place. After looking for months, the family determined it would be best to build the restaurant. They spoke to their lender and learned about the SBA 504 loan and decided it was the right fit for them. Through the 504 Program, the borrower was able to construct their building for 10% down and move their operations to a new building. The low down payment allowed them to keep adequate working capital to cover the costs of moving and for hiring and training new employees for the new, larger location.
In another example, a small business offering childcare services in New Mexico used an SBA 504 loan to refinance an existing owner-occupied commercial mortgage. The SBA and TPL each financed about 40% of the appraised value, and the borrower received $350,000 in cash out to cover payroll for several months during the pandemic. The new loan payments are 47% less than the original, saving the small business enough to hire three new employees!
As you can see, there are many ways that the 504 Program can help you achieve your business goals. You can improve your company’s cash flow by refinancing high-interest debt using your commercial property, purchase equipment to help your business grow, and even buy a new building to grow your operation. State ECU and Enchantment Land CDC are here to help you navigate the program.
Enchantment Land Certified Development Company (ELCDC) is a leading private, non-profit organization financing business loans throughout New Mexico and El Paso, Texas. ELCDC offers competitive low-cost, long-term loans by partnering with the Small Business Administration (SBA) and local financial institutions to provide 504 business loans in our community. ELCDC has over 75 years of combined commercial lending expertise.
Gabriel Fernandez is the State ECU Commercial Lender for the Albuquerque Metro Area. Gabriel is a New Mexico native and comes to State ECU with extensive experience in commercial real estate lending and portfolio management. He has financed a broad range of property types, such as apartments, warehouses, retail buildings, and more. Gabriel helps growing businesses and investors acquire the resources they need to prosper. and speak with Gabriel about your commercial lending needs and see what he can do for your business. You can also find Gabriel on , by phone at (505) 989-5756 or send him an to get in touch.