In uncertain times, how can the 25-year SBA 504 loan help my business?

April 4, 2019

As a small business owner, no matter how many hours your clock in or how much you plan ahead, a lot is out of your control. Ever-changing regulations, economic conditions and competition can keep even the iron-willed entrepreneurs up at night.

25-year term benefits

• Longer repayment period means more affordable monthly payments.
• Savings can be reinvested into the business to stimulate more growth.
• Below-market, fixed rate over longer period of time.

Instead, shift your focus to what you can control such as your monthly occupancy cost by managing your mortgage expense, which accounts for a chunk of your business’ overhead. With the debut of the 25-year SBA 504 loan one year ago, keeping this important expense low, stable and predictable has been easier than ever.

By buying a building versus renting with a long-term, fixed rate loan — you’re not only controlling your monthly costs, you’re also removing risk off your plate.

We’re talking about things that can affect just about any small business owner who rents, from an un-renewed lease agreement to a souring landlord-tenant relationship.

What is a 25-year SBA 504 loan?

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The SBA 504 loan 25-year term offers you long-term, below-market financing for purchases such as commercial buildings.

Small business owners interested in buying buildings, land, or major equipment can use SBA 504 loans to do just that with just 10 percent down. With a conventional bank loan, you’re looking at a down payment of 20 percent or 30 percent in most cases.

The U.S. Small Business Administration, or SBA, has long offered 10-year and 20-year SBA 504 loans. And starting April 2018, the agency began to offer the 25-year term option. With the additional five years’ maturity, you essentially enjoy a fixed, below-market rate for longer. This means lower monthly costs.

This long-awaited move to add a 25-year term to the SBA 504 program was designed to broaden the availability of the SBA 504 product to more entrepreneurs and give borrowers more financing choices.

How can the 25-year SBA 504 loan help me?

In addition to the financing commercial buildings, SBA 504 loans can also finance major equipment.

By extending the payment cycle on an SBA 504 loan, you’re reducing the monthly loan payments. This can be advantageous for borrowers in many ways. For one, the money you’ll be saving can be used to strengthen your business, such as reinvestment without taking on outside debt, starting a rainy-day fund, or saving for your next SBA 504 down payment.

Fixed, lower payments also give you peace of mind, especially when you’re facing rising operating expenses and interest rates. Remember those factors that you can’t control for? There’s not much you can do about outside factors. But you can control your monthly occupancy costs, allowing you more financial room to handle unexpected issues.

Mike Owen, chief credit officer at SBA lender CDC Small Business Finance, calls the 25-year SBA 504 option “another attractive financing option for our small business borrowers.”

“Not only can small business owners lower their monthly payments with a 25-year loan term,” Owen added. “This new product adds another level of borrower value to the 504 loan program.”

Why this business owner got a 25-year SBA 504 loan

Arun Cavale, managing principal and chief executive of supply-chain consultancy Nexinfo, used an SBA 504 loan to buy a three-story, 23,000-square-foot building to house his growing company. Cavale, who was previously renting, chose the 25-year term option to finance the purchase of the Santa Ana, Calif. commercial property.

Mark Hogan

Since his loan funding in December 2018, Cavale has seen the 25-year SBA 504 loan as the ideal tool to stabilize his occupancy costs while giving him the long-term peace of mind many entrepreneurs are seeking.

“While many people may look at getting the most optimal deal from an interest-rate standpoint, we believe that the stability and predictability over the long-term are more important than the short-term gains based on the fluctuations,” Cavale said.

“We are not in the business of leveraging interest rate fluctuations and this current predictability gives us the ability to focus on our core business,” he added.

Senior SBA 504 loan officer Mark Hogan, of CDC Small Business Finance, made this deal happen. The 25-year alternative, he says, is doing exactly what it was designed to do.

“I can see why Arun’s company is so successful, as he looks to see what’s best for his business,” Hogan said.

“The 25-year fixed rate has been embraced all small businesses like his and just another reason the SBA 504 is such a tremendous financing vehicle,” he added.

With 25-year option, SBA 504 loan continues to spur jobs

The SBA designed the 504 loan program to function as a generator of economic development, in other words, jobs.

The overarching concept was the SBA would back these loans, allowing community lenders (or CDCs) to finance businesses that many traditional lenders would consider a bit riskier due to a slightly imperfect credit history, the applying business is still in its early stage-business development period or has not fully stabilized its revenue and income performance to a managed risk level traditional lenders desire for its borrowers.

Armen Madatyan and Dean Aloe, from left to right, are senior commercial lenders at CDC Small Business Finance.

By funding these underserved entrepreneurs, the SBA 504 program has helped create or retain more than 650,000 jobs nationwide between just fiscal 2010 and fiscal 2017 alone, according to the SBA’s most recent numbers.

The introduction of the 25-year SBA 504 loan option a year ago has not changed the mission of the overall program. If anything, it’s been strengthened.

With the aid of the 25-year loan, Richard Barkhordarian has already hired two new people at his company, the Barkhordarian Law Firm, which specializes in workers’ compensation cases. By early summer, he plans to hire a third employee.

Barkhordarian used the long-term, fixed-rate financing to buy and complete tenant improvements on an 8,100-square-foot building in Culver City. The loan not only helped him stabilize his monthly occupancy costs, it also secured him a long-term site to grow his workers’ compensation law firm and expand into the areas of employment law and personal injury.

“Thank you to everyone for putting in the time and hard work to getting this done,” said Barkhordarian, referring to the CDC loan team who helped him. “I cannot tell you how much you have helped me and my business.”

This loan deal was made possible by CDC’s Team LA, SBA 504 loan officers Armen Madatyan and Dean Aloe.

25-year loan term helps community lenders stay relevant

SBA lenders in the U.S. including CDC Small Business Finance provided more than $115 million in 25-year SBA 504 loans to borrowers nationwide, in the agency’s fiscal 2018, whose period ended in Sept. 30, 2018.

Mike Owen

The addition of the 25-year 504 option allows the program to become increasingly more attractive than the SBA 7a loan, which has long had a 25-year term option.

“The 25-year 504 term option compares favorably to the 7a product based on both having a 25 maturity options but with the caveat 504 applicants always receiving a fixed interest rate option through the 504 loan, which is not always the case in 7a,” said Owen, CDC’s top SBA 504 expert.

“The longer 504 maturity makes us more competitive and borrower value oriented in the market,” he added. “And it helps us qualify more small business owners.”

CDC Small Business Finance is a leading SBA 504 lender in the nation and nonprofit. We’re committed to your long-term business success by offering long-term, fixed rate financing for your building, major equipment or land purchases.

Tell our loan experts about your business, and they’ll work to match you with a financing plan that best suits you. Let’s talk! Reach us at loaninfo@cdcloans.com or (619) 243-8667.

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