Understanding the Structure of the SBA 504 Loan Program - SBA Loans Blog

Understanding the Structure of the SBA 504 Loan Program

July 22

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By Beau Eckstein

July 22, 2024

The SBA 504 Loan Program is a powerful financing tool for small businesses looking to acquire or renovate commercial real estate or purchase heavy equipment. In this post, we’ll delve into the structure of the SBA 504 loan, explain its components, and highlight how it can benefit your business. If you're considering this type of financing, you’re in the right place.

What is the SBA 504 Loan Program?

The SBA 504 Loan Program is designed to provide long-term, fixed-rate financing to small businesses for the purchase of fixed assets. These assets can include commercial real estate, buildings, and large equipment. The goal of the program is to promote economic development and create jobs.

The Structure of the SBA 504 LoanTwo-Part Loan Structure

The SBA 504 loan is unique because it consists of two separate loans:

Senior Loan: This loan is provided by a bank or a private lender and typically covers 50% of the total project cost.

Junior Loan: Also known as the debenture, this loan is funded by a Certified Development Company (CDC) and covers up to 40% of the project cost. The remaining 10% is usually the borrower's contribution.

The Role of the Debenture

After the construction project is completed and the certificate of occupancy is obtained, the debenture is sold in the secondary market. This process locks in the interest rate for the junior loan, which can be fixed for up to 25 years. The current debenture rate, as of today, is 6.281% for a 25-year term. This fixed-rate feature provides stability and predictability for business owners.

Key Features and BenefitsFinancing Flexibility

For acquisition projects, the SBA 504 guidelines allow for up to 90% financing. For instance, on a $1 million project, the financing might be structured as follows:

$500,000 Senior Loan

$400,000 Junior Loan

$100,000 Borrower's Contribution

For startups and special-purpose properties, there are additional considerations:

Startups receive a 5% haircut, allowing up to 85% financing.

Special-purpose properties, such as gas stations, incur an additional 5% haircut.

Comparson with SBA 7(a) Loans

While both SBA 504 and SBA 7(a) loans serve small businesses, they have distinct differences:

Interest Rates: SBA 504 loans typically offer better rates but might come with higher costs.Prepayment Penalties: SBA 7(a) loans have a three-year declining prepayment penalty for terms over 15 years, whereas SBA 504 loans might have more stringent penalties.

Customization and Negotiation

The senior loan portion of the SBA 504 can be tailored to the needs of the borrower. Terms can vary from 20 to 30 years, and some lenders offer interest-only periods during construction. The flexibility in structuring these loans allows businesses to find the best fit for their specific needs.

Finding the Right Lender

Different banks have different appetites for various types of projects. For example:

Some banks specialize in hospitality projects, such as flagged hotels.

Others may shy away from certain types of properties, like motels or campgrounds.

Navigating these preferences is crucial, and that’s where professional guidance comes in handy. Consultants and financial advisors, like myself, can help match your project with the right lender, often without charging a fee, as we are compensated by the banks

Additional Services

Beyond SBA 504 loans, we offer assistance in:

Franchise acquisitionBusiness expansionRefinancing existing loans

We also handle USDA loans and other financial products, tailoring our services to meet the unique needs of each client.

Conclusion

The SBA 504 Loan Program offers a robust financing solution for small businesses looking to invest in real estate and equipment. Understanding its structure and benefits can help you make informed decisions and leverage this program to grow your business. For personalized advice and support, reach out today and take the next step toward securing your business’s financial future.

Working with Beau Eckstein as your commercial mortgage advisor when trying to locate the best SBA financing can be beneficial because he has extensive experience and knowledge in the field. He can help navigate the complex process of obtaining SBA financing and assist in finding the best options for your specific situation.

Additionally, his established relationships with lenders can help increase the chances of getting approved for funding.

Overall, working with a knowledgeable and experienced advisor like Beau Eckstein can greatly increase the chances of successfully obtaining SBA financing.

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