Many commercial mortgage brokers still believe Small Business Administration (SBA) loans can only finance projects in the $1 million to $3 million range. Those with that belief may be leaving deals — and commissions — on the table.
In reality, SBA 504 loans — specifically structured for commercial real estate purchases — can finance deals upwards of $20 million. Many small businesses want to take advantage of the high-project ceiling SBA 504 loans provide before interest rates start to rise, which many analysts project will happen later this year.
The 504 basics
The SBA 504 loan has a collaborative structure. A certified development company (like CDC Small Business Finance), typically nonprofit, partners with a bank and the small-business owner to assemble the financing package. The CDC provides 40 percent of the project cost with an SBA-guaranteed loan and the bank injects 50 percent, leaving the small-business owner with a 10 percent downpayment.
Along with 90 percent financing, SBA 504 loans offer fixed interest rates. The rate has been less than 5 percent since July 2014, and hasn’t been more than 6.1 percent since January 2009. There also are zero- to 25-year amortizations and no balloon payments associated with the program. Brokers considering a 504 loan for their clients should be introduced to the SBA 7(a) loan as well, because it is a more lucrative product for banks. This loan only can accommodate a project size up to $5 million, however.
Working with a CDC
The good news is that mortgage brokers don’t have to be experts in the SBA 504. With their experience and expertise in the program, CDCs can assist brokers in many ways. They can prequalify the broker’s clients and help structure projects to ensure quick SBA approval.
CDCs also can help educate clients about the benefits of 504 financing, which are varied. Along with the low, 10 percent downpayment, owners get tax savings and accumulate equity. The business owner must only occupy 51 percent of the building being purchased, and no additional collateral is required.
Reputable CDCs maintain relationships with a variety of banks and know their credit parameters. This makes it easier to query banks that may want to partner on the SBA 504 financing package, although CDCs also can work with a client’s bank of choice. In addition, CDCs can monitor the financing process and ensure the deal closes in a timely manner.
Leading by example
No state better shows the possibilities available from SBA 504 loans than California. In 2014, the Golden State saw nearly 300 deals of more than $3 million in project size use SBA 504 financing. The total amount of those deals was a whopping $1.6 billion.
Hotel projects led the pack of larger SBA 504 loans approved in California this past year, with two such projects exceeding $20 million and several others reaching upward of $10 million. Wholesale, retail and manufacturing companies, in particular, have taken advantage of SBA 504’s high ceiling. In California, Arizona and Nevada alone, some 1,250 small business owners were approved for SBA 504 loans in 2014, totaling $2.8 billion in project value.
Many small-business clients eventually come to the crossroads of determining whether buying or leasing their facility is the best business strategy. An SBA 504 loan makes purchasing attractive because the cash downpayment required by the owner is far less than conventional loans. In addition, there are long-term tax and equity benefits.
As a mortgage broker, by learning more about high-ceiling SBA 504 loans and finding a reputable CDC with whom to work, you can create more opportunities for yourself and your clients.
This article originally appeared in Scotsman Guide (June 2015 issue)