The Benefits of a SBA 504 Loan for Small Business

Today’s SBA Loan video outlines the benefits of the SBA 504 loan program. See the full transcript below the video for easy reference.

What is a SBA loan? To give you some background, the Small Business Administration was founded in 1953 at the suggestion of President Dwight Eisenhower to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”  The organization also sought to ensure that a fair proportion of government contracts would be awarded to small business.  The SBA 504 loan program was founded five years later as an extension of this mission.

The SBA 504 Program has several key benefits for financing a business. The primary benefit of the program is that it provides a means to obtain financing for larger projects when traditional bank financing may not be available.  Many small businesses do not have the size and stability required to make banks comfortable extending large amounts of debt.  As we’ll discuss later, the program entices banks to participate by giving them first rights on all project collateral while only requiring them to fund 50% of the overall project.  The bank may, for example, end up with a $1MM loan on $2MM of collateral.  This makes the bank feel very comfortable even in the worst case scenario of their borrower going out of business, that the bank will likely not suffer a loss.

Another key benefit of the 504 program is that it generally only requires the business to contribute 10% of the overall project costs.  Again, many small businesses can find it very difficult to accumulate enough cash to contribute a typical 20-25% down payment or more.  This feature of the SBA 504 loan program eliminates that roadblock.  In addition, while cash may be required by the bank, the SBA 504 program itself does not require a cash down payment.  The business may be able to make their 10% contribution in other ways, such as land or non-bank debt.

A third very important benefit is that generally, the 504 SBA small business loan program offers the business the lowest long-term fixed rate available on 40% of the project.  As we’ll mention later, the SBA portion of the financing will be locked for either 10 or 20 years and business owners can have peace of mind knowing that almost half of their total financing is locked in at below-market rates for the entire length of the loan. 

The final advantage I’ll mention is that by utilizing the 504 SBA loan program, your bank will be freed up for additional business lending when you need it.  As I mentioned earlier, a smaller business’s lack of size and stability will limit its ability to get traditional bank loans.  Regardless of other factors, a bank will likely not be comfortable with aggregate loans to a business over some level.  That level will vary bank to bank but generally speaking, if you’re going to be requesting bank loans in the future it’s better to leave some room between what the bank has loaned you and their maximum comfort level.  Have regular discussions with your bank about your potential needs in the future and make sure you understand your limitations.

 

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