What is an SBA 504 Loan?
An SBA 504 loan (sometimes also called an SBA CDC loan), is a loan for helping small businesses grow through the financing of fixed assets (land, real estate, or machinery/equipment) that is secured by the Small Business Administration (SBA). SBA 504 loans are unique in that they are not only SBA-backed, but this secured portion is made possible via a Certified Development Company (CDC): a non-profit organization that seeks to cultivate economic growth in a specific local area. This portion is usually 40%, while most of the remainder of the loan (usually 50%) is provided by a bank or other conventional lender, leaving the borrower responsible for about 10% of the loan. SBA 504 loans can be for amounts of up to $5 million. In addition to buying fixed assets, they can also be used for improving your business, such as through renovating or modernizing facilities, or improving streets, parking lots, or landscapes that may affect your business. Beyond this, 504 can have more general uses as well, such as for working capital, refinancing existing debts, or even speculating/investing in real estate. To obtain an SBA 504 loan, borrowers will typically put down 10% – 15% as a down payment. CDC portions of a 504 loan have a fixed-interest rate and 10 – 20-year terms, while the portion provided by a bank may have fixed or variable rates, and will have a 20 – 25 amortization period. SBA 504 loan applicants will need to fill out an SBA 1244 form to submit to their loan officer or the SBA. At Online Loans we’re looking to make worthwhile financing a reality for those in need, and to that have broken down the sea of information available about SBA 504 loans into a digestible need-to-know format for your benefit.
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Both the CDC- and the bank-portion of an SBA 504 loan will have their own interest rates. CDC rates are are fixed and set by the SBA at a maximum of 4.88% for 10-year loans, and 5.15% for 20-year loans. The bank portion of the loan will have rates that are set by the bank itself. These tend to be low as well – typically 1.5% – 3.5% above a benchmark rate (such as a Treasury rate). The bank’s rates may also be adjustable, and will often have amortization periods of 20 – 25 years, depending on the size of the loan.
SBA 504 loans do not have a minimum credit requirement. That said, both your personal and business credit score will always play an important role in determining your eligibility. In particular, a strong business credit score will be important to the CDC is reviewing your application. As for the bank lender, credit scores may not be as crucial as with other kinds of loans, given that any real estate purchased with a 504 loan acts as a lien for the bank, providing extra security and incentive for lending money.
In addition to purchasing fixed assets, SBA 504 loans can be used for renovations, either on facilities, you already own, or for purchasing new facilities that would need to be renovated or remodeled to suit the needs of your business. SBA loans also offer the Green Energy Benefits program, which increases the amount of the loan for which you are eligible if the renovation in question promises to reduce energy costs by 10% or more.
SBA 504 Loan vs. Conventional Loan
SBA 504 loans are ideal for the purchasing of fixed assets or other business-related financing given their longer payment terms (up to 25-year amortizations) and larger amounts – CDC portions can be up to $5 million, while bank portions do not have imposed limits. Furthermore, CDC loans entail the purchased assets acting as liens for both the CDC and the bank-lenders, so that interest rates and down payments tend to be lower than for other loans.
CDC portions on SBA 504 loans have 10-year pre-payment penalties, while it is up to the bank lender whether its portion of the loan will feature any penalties. For the CDC, prepayment penalties are calculated by multiplying the debenture rate by 0.01 – 1.0 (depending on which of the 10 years the prepayment occurs) and then multiplying this by the remaining balance on the principal. After the 10th year, prepayment penalties begin to decline, and by the 11th year (for loans longer than 10 years) they’re no longer in effect.
All in all, 504 loans are a great way to get the financing you need to grow your business. Not only do they cover many different kinds of costs, but they’re more affordable than many other business loans. That said, it’s always good to compare all your options. There are lots of borrowing options out there for business owners, so take your time and be sure to settle on the one that’s right for you.