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SBA 504 financing attractive option for small business

Dennis "Denny" Williams

Business owners looking to purchase real estate, including industrial property, for their business should consider the U.S. Small Business Administration’s 504 loan program.

The SBA 504 loan program is a loan program that a bank and a Certified Development Company work together to provide to the small business. The SBA generally considers a business small if it has a net worth less than $15 million and net profit of less than $2 million. The program allows small businesses access to long-term, fixed-rate financing that is typically only available to larger businesses. The program has some other eligibility guidelines such as requiring that the small business occupy at least 50 percent of the space in the building being acquired.

The program allows for a down-payment as low as 10 percent of the cost of the real estate compared to a conventional loan which would require a down-payment of around 25 percent.

The program works like this: The business buying the building provides a down payment of 10 percent toward the purchase of the property. The bank will make a loan for 50 percent of the cost of the real estate, and the SBA 504 loan will be for the remaining 40 percent of the cost of the real estate. The SBA 504 portion of the loan has a maturity of 20 years and an interest rate based on the current bond market. The interest rate is currently 2.47 percent fixed for 20 years (this is the July, 2012, interest rate). The 20-year fixed interest rate for SBA 504 loans is set each month based on the bond market that month. The bank loan is priced by the bank funding the loan but is typically a five-year adjustable interest rate and it must be for a term of at least 10 years per SBA policy.

The bank’s loan will be in a first lien position on the real estate being acquired, and the SBA 504 loan will be in a second lien position on the real estate being acquired. The maximum SBA 504 portion of the loan is generally $5 million but there is no SBA imposed limit on the bank loan size. Most banks will want to keep the total loan size (bank and SBA 504 loan) in proportion to the 50-40-10 split discussed above. This means that a business could utilize an SBA 504 loan to purchase a building up to almost $15 million. This is definitely a program that small and middle market borrowers can utilize.

The structure of the SBA 504 program allows the bank the ability to open its credit box a little wider than for a conventional loan. Since the Bank is in a first lien position at a loan-to-value ratio of approximately 50 percent, the bank is willing to reduce its approval criteria from that of a conventional loan because it is well secured by the real property being acquired and has the SBA loan lien behind its lien.

The small business borrower also benefits from the longer maturities of the 504 loan program. Under the 504 program, a business will not have to worry about a balloon payment coming due and its bank not renewing the loan. I would recommend that a business look for a bank that offers a 20 to 25-year fully amortized first lien position loan so there will be no future renewal uncertainty or more importantly no future renewal fees. Many banks will only offer the minimum required maturity of 10 years on the bank first lien position loan, but I would recommend looking for a bank that will offer a 20- or 25-year maturity for peace of mind.

This article only touches on the very basics of the SBA 504 program. Many commercial lenders can help you learn more.

Dennis “Denny” Williams is Northern Nevada Regional President of Meadows Bank. Contact him at 775-741-8059 or dwilliams@meadowsbank.com.


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