As we step into February 2025, it’s time to take a closer look at the current state of SBA 504 loan rates, recent updates, and what it means for your business. Understanding these financial tools is crucial for making informed decisions that can help you expand and grow your enterprise.

Current SBA 504 Loan Rates

The current rate for the 25-year debenture sits at 6.28%, a slight decrease from last month's rate of 6.52%. This drop indicates a favorable trend for borrowers looking to finance their business through the SBA 504 loan program.

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It's important to note that the SBA 504 loan structure consists of two loans: a first loan and a second loan, with the latter being the guaranteed piece. Typically, banks fund both loans, and after the certificate of occupancy is granted or the loan closes, a debenture is issued. This is when the loan is sold off in the secondary market, locking in your term for either 20 or 25 years.

Understanding the 504 Loan Structure

The SBA 504 loan has a unique underwriting process compared to other SBA loans, such as the 7(a). The senior debt is negotiated at the bank or credit union level, and there are two distinct underwriting processes involved. First, the bank or credit union will underwrite the initial loan, and then it goes to the Certified Development Company (CDC) for additional packaging and underwriting before it reaches the SBA.

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This two-step process can seem complex, but it allows for greater scrutiny and assurance of the loan's viability. While the 7(a) loans can cover blue sky or working capital needs, the 504 loans are more asset-based, specifically designed for purchasing fixed assets that promote business growth.

Recent Updates to the SBA 504 Program

Several updates have been made to the SBA 504 program that are essential for prospective borrowers to understand:

• Loan-to-Value Ratio Increase: The maximum loan-to-value ratio has increased from 85% to 90% for debt refinancing without expansion. This change includes cash-out options for eligible business expenses.
• Eligible Business Expenses Cap: The cap on eligible business expenses has been raised, moving beyond the previous limit of 20% of appraised value.
• Refinancing Government Debt: When refinancing into another 504 loan, the requirement for a 10% substantial benefit test has been removed. Now, any savings on the proposed new loan are sufficient.
• Secure Debt Eligibility: Secure debt can now qualify as an eligible business expense in 504 debt refinancing, which was previously a significant hurdle.

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These updates not only simplify the process but also provide more flexibility for businesses looking to refinance or acquire new assets. The 504 loan program is designed to facilitate larger deals than the 7(a) loans, making it an attractive option for many entrepreneurs.

Comparing SBA 504 and SBA 7(a) Loans

When considering financing options, understanding the distinctions between the SBA 504 and SBA 7(a) loans is critical. The SBA 7(a) loan is more versatile, allowing for funds to be used for various purposes, including working capital and goodwill deals. In contrast, the 504 loan is primarily asset-based.

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Choosing between these two loan types often depends on the specific needs of your project. For example, if you’re looking to purchase real estate or large equipment, the SBA 504 loan is likely the better choice. If your needs are more operational or involve acquiring a business, the SBA 7(a) might be more appropriate.

Getting Approved for an SBA 504 Loan

Securing an SBA 504 loan requires a strategic approach. Here are some tips to enhance your chances of approval:

• Work with a Preferred Lender: Engaging with a PLP (Preferred Lender Program) lender can streamline the process significantly. They can underwrite in-house, expediting your loan application.
• Document Your Business Plan: A solid business plan is essential. Ensure that it clearly outlines your business goals, how the loan will be used, and how you plan to repay it.
• Show Financial Stability: Lenders will look for indicators of your business's financial health. Be prepared to present financial statements, tax returns, and any other pertinent documentation.

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By following these steps and understanding the requirements, you can position yourself favorably for approval. If you have questions or need guidance, feel free to book a call for personalized advice.

What’s Ahead for SBA Financing?

Looking forward, there are anticipated changes in the SBA landscape. One major expectation is an increase in the SBA 7(a) loan limit, which has remained at $5 million since 2010. Many believe it should be raised to at least $10 million to better serve the needs of growing businesses.

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Additionally, with a new SBA administrator at the helm, potential shifts in the 504 program are also on the horizon. As the market evolves, we can expect more updates that aim to improve access to capital for small businesses.

Conclusion: Take the Next Steps

The SBA 504 loan program continues to be a robust option for businesses looking to finance their growth through real estate and equipment acquisition. With the recent updates and current favorable rates, now is an excellent time to explore this financing avenue.

If you're interested in acquiring a business, don't hesitate to reach out. You can visit bookwithbeau.com to schedule a consultation. Additionally, for those who want to stay informed about the latest in business ownership, join our Business Ownership Academy or subscribe to The Business Ownership Newsletter.

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Remember, owning a business not only provides financial benefits but also a sense of accomplishment and security in today’s ever-changing market. Let’s make your business dreams a reality!