Why Choose An SBA 504 Loan?

Benefits for Borrowers

  • Up to Ninety-percent (90%) Financing
  • Long-Term, Below-Market Fixed Interest Rates
  • Longer Loan Amortizations
  • No Balloon Payments

SBA 504 Loans are the best option for SMALL BUSINESS FINANCING!

Benefits for Lenders & Credit Unions

  • Ability to offer up to 90% long-term financing for the purchase of commercial real estate, leasehold improvements, machinery and equipment, and other eligible fixed assets.
  • Expands your business loan portfolio.
  • Minimizes collateral risk; puts your lending organization in a first lien position with an attractive 50% LTV.
  • Lending organization makes its own credit decisions with its own loan documentation.
  • Lending organization sets its rates and fees.
  • Earn fees and interest income on interim loans related to the project.
  • SETEDF can work directly with the 504 applicants, saving your staff valuable time.
  • Helps manage lending limits and industry exposure.
  • CRA credits – banks that participate in the SBA 504 Loan Program are eligible for Community Reinvestment Act (CRA) credit on certain projects.

Benefits for Realtors & Brokers

  • Attract more buyers with up to 90% financing at below-market, fixed interest rates.
  • 10-, 20- and 25-year amortization terms available (no balloons) on the SBA portion.
  • Professional fees and soft costs can be financed in the loan, minimizing out-of-pocket costs.
  • Projects from $250,000 to $15 million+.
  • Make a deal happen that might not have worked with conventional financing.

Benefits for Economic Development

  • Economic developers can help borrowers obtain below-market, true fixed-rate financing with low down payments. And, unlike conventional loans, 504 transactions include verifiable job creation and economic impact data, which is provided to economic developers.
  • 504 loans can be used in a wide variety of projects, including commercial, franchises, health care, hospitality, manufacturing, retail, service, and more.
  • Green initiative projects are also eligible under the program (reduced energy consumption and renewable energy or fuels).
  • Many deals that cannot be financed conventionally or through industrial revenue bonds can be financed through the 504 Loan Program. In fact, the 504 program is attractive to all projects due to its below-market fixed rates and low-down payment requirements.
  • The owner can operate in 51% of an existing building and lease the other 49%, creating an income stream to strengthen cash flow.
  • Banks are willing participants because they can fund as little as 50% of the project and remain in a first-lien position. SETEDF/SBA funds 40% of the project (up to $5.5 million) and takes a second-lien position and the borrower puts down just 10% in most cases. There is no limit on overall project size.

SBA 504 Vs Other Loans (7A & Conventional)

The SBA 504 loan allows small businesses to put less money down and take advantage of longer below-market fixed interest rates, making owning commercial real estate an option for many small businesses that otherwise might not have the opportunity.

The following is a comparison of the financing variables typically available for small businesses who are seeking to purchase their own commercial real estate. Decide for yourself which product best fits your needs.

SBA 504 Loan 7(a) Loan Conventional
Down Payment Usually 10% Usually 10 - 30% 25% for real estate
Interest Rate Fixed for 10, 20 or 25 years. Rates set once debenture sells. As an example, over the last ten years fixed rates have ranged from 4-6% Typically variable, Max. Prime Rate (3.25%) + 2.25-2.75% based on term; + fees; 0.55% ongoing guaranty fee + 0.25%-3.75% on guaranteed portion of loan, based on loan amount; some fixed-rate options available Typically 25-year amortizing fixed for 5 years in the mid 6% range
Length of Term

10, 20 or 25-year for real estate

10-year for equipment

10-year for lease hold improvements

Determined by industry type

Annual sales no to exceed range of $750,000 to $33.5 million for retail, service, and agriculture

Number of employees not to exceed range of 100 to 1,000 for wholesale and manufacuring

Determined by lender
Loan Size $125,000-$5.5 million Up to $5 million Determined by lender
Collateral

Generally, project assets being financed are used as collateral

Personal guaranties of the principal owners of 20% or more ownership are required, business guarantee

Subject assets acquired by loan proceeds

Pledge of personal residence unless bank can justify why unnecessary

Personal guaranties of the principal owners of 20% or more ownership are required

Generally, project assets being financed are used as collateral

Personal guaranties of the principal owners of 20% or more and business guarantee

Best Use Owner-occupied (at least 51%) real estate. Equipment finance Short-term or long-term working capital and to purchase an existing business, refinance existing business debt, or purchase furniture, fixtures and supplies Real estate
Advantages
  1. 10% down!
  2. Lowest rates of any government guaranteed business loan
  3. Stretch debt over a long term to free up cash and working capital in the business
  4. Long-term debt improves credit picture to facilitate credit lines and other short-term loans if needed
  5. Diversify your business investment – real estate provides stability during economic instability
  6. Fees and closing costs can be financed in the package
  1. Short-term working capital
  2. Popular product with banks
  1. Higher fees, rates may incent banks to lend
Disadvantages Limitations on use: owner occupied real estate, equipment and leasehold improvements
  1. Higher rates than (504)
  2. Variable rates can rise
  3. Balloon payments can cause instability
  4. More expensive debt can impede the business long-term
Much higher down payment reduces business liquidity
Extra Tips Ask the bank about an SBA 504 Loan – otherwise they may not tell you about it. Expect rates to rise from recent historically low levels Do thorough price comparisons

Frequently Asked Questions

Your business will usually qualify as a small business concern for SETEDF’s SBA 504 Loan Program if it has less than $15,000,000 in net worth and made less than $5,000,000 in net profit per year, averaged over the last two years. The SBA generally defines a small business as a business that is independently owned and operated in the United States and is organized for profit.

Any loan requires a standard application with supporting documentation. However, SBA has taken great strides in reducing the number of forms needed to apply for a loan. In fact, SBA typically doesn't require any more forms or information than commercial lenders do. SETEDF continues to stream line the process even more by working side by side with your lending institution from the very beginning stages of your project. Upon your approval, documents can easily be securely shared electronically between SETEDF and the third-party lender (your bank or credit union), reducing time-consuming redundancy.

Yes. Lenders can learn quite a bit from a company's business plan. Whether you are a start-up or an established business that wants to expand, a business plan will summarize your experience and the nature of your business. It also gives lenders a clear explanation of how your business will succeed and pay back the loan. Southeast Texas Economic Development Foundation works directly with the local Small Business Development Centers (SBDC) who have the resources to help you create a business plan as well as other documentation you may need when applying for a 504 loan.

Small Business Development Center

A lot depends on the borrower and the speed in which documentation is provided. Generally, once we receive the loan approval and term sheets from the lender, we can pull together the 504-loan package relatively quickly.

Barring no unforeseen issues, packaging and SBA loan approval should be less than three weeks.

  • Miniumum 10-year optional term for a 20-year debenture
  • Rates and fees set by Lender
  • Assumable loan

SETEDF/SBA does not manage any construction risk. The lender is required to manage the construction process. SETEDF/SBA does provide an upfront commitment to give the Lender comfort during the process. Once the construction is complete, SETEDF can move to a final closing.

Yes. There is a declining prepayment penalty for half the term of the loan (i.e. 10-year prepayment penalty on real estate; 5-year prepayment penalty on machinery and equipment).

Why is the prepayment penalty required?

A prepayment penalty is required because investors in the secondary market are guaranteed a specific return when they purchase a pool of SBA 504 debentures.

Who receives the prepayment penalty?

100% of the prepayment penalty goes to the bond investors and is not paid to the SBA or SETEDF.