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Find Out How To Get An SBA 504 Loan for Commercial Real Estate and Heavy Equipment

Get equity, tax and cash flow advantages by owning your commercial property or equipment

There are many advantages to owning your business’ building instead of renting your commercial space. With the SBA’s flagship program, the SBA 504 loan, you can finance these types of business investments with only 10% down. The SBA 504 Loan is designed for business owners who are looking to buy, construct or improve commercial or industrial buildings and for business owners who want to buy and install heavy machinery and equipment at their business.

Benefits of Owning vs. Leasing:

There are many advantages to owning commercial property. Here is a list of many of the benefits so you can make the best decision for your business.

  • Fund your retirement: By owning your building, you have an asset that has value beyond the success and lifecycle of your business. After retiring your debt, you can continue to lease the property and continue to get income or you can sell it and take the proceeds to support your retirement.
  • Build equity: Investing in your business instead of supporting a landlord with your rental payments is often a smart business decision. We will help you look at your current lease payments and identify the benefits of purchasing property to add a real estate asset to your financial portfolio.
  • Fixed cost for building expense: By locking in a fixed rate, you will know your occupancy cost for the term of the loan which allows for stability and more accurate data for financial forecasting and planning. When you lease, you have to adjust for unexpected rent increases which makes your costs variable and less predictable.
  • Increase your borrowing power: With a loan, you build credit and can open up opportunities for borrowing in the future. Over the course of owning a business, many businesses need multiple loans to support plans for growth. Increasing your borrowing power will help set you up as a strong candidate for additional financing.
  • Tax deductions: The costs associated with owning a commercial property can provide tax benefits in the form of mortgage interest and property taxes.
  • Cash flow: Depending on the rate and terms, your monthly payment could be less than a lease and help you keep more of your cash for other business uses.

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What’s the Difference Between An SBA 504 and Conventional Loan?

It is important to understand your options so you can choose the business loan that is best for your business. The following information is here to arm you with the main differences to know about lending institutions and key topics to discuss with a loan officer to help you make the best choice.

  • SBA 504 Loan provided by a Certified Development Company (CDC): Created by the U.S. Small Business Administration, this loan is available through nonprofit mission-based lenders, also known as CDCs. A nonprofit lender’s mission is to help match you with the loan product that will best support your growth, long-term sustainability, success and positive impact on your community. The loan package is partially guaranteed by the federal government and is designed to help businesses attain financing for major fixed assets like real estate and equipment. Machinery examples can include CNC machines, cranes, cutting machines and construction equipment. These loans require a 10% down payment, offer a long-term lower cost fixed interest rate, and do not require you to pledge additional collateral.
  • Conventional Loan provided by a bank or credit union: This loan is not insured or guaranteed by the federal government. Loan approval for a conventional loan is founded on managing the bank’s risk. It requires a 20-30% down payment. It can have a variable interest rate and most often has a shorter loan term (less than 10 years.) with a balloon payment. You may be required to pledge additional collateral like other business assets or your home.

What you need to know about the SBA 504 loan

If you are considering buying your own building or equipment, talk with one of our SBA 504 loan experts to learn more about how each of these advantages will help your business grow and succeed.

  • With a long-term fixed interest rate loan you always know your monthly occupancy cost: With an SBA 504 loan your rate won’t adjust due to changing lending conditions. So, an increase in interest rates due to inflation will not affect your payments. With a 20-year term you are able to conserve operational cash flow and build your business credit which will continually strengthen your financial position.
  • Save money with below-market interest rates: Every day, every month, every year you will be saving money with an SBA 504 loan compared to a conventional loan with a similar term. For example, on average you can save up to 5% on each monthly loan payment based on receiving the below market interest rate the SBA 504 offers. So, on a $1,000,000 loan there will be an annual savings of $3,000 and over a 20-year term that is a $60,000 savings. (The calculation is based on a 0.5% difference between the interest rate charged an SBA 504 versus a conventional loan – the example uses a 4% interest rate for 504 loan compared to 4.5% for a conventional loan)
  • Investing only 10% down helps retain capital in the business: Conventional bank loans require a 20 to 30% down payment. The SBA 504 Loan has a down payment minimum of 10% – allowing your business to retain the additional 10 to 20% of your cash when buying a building. If you could save that type of money buying real estate imagine using that savings to grow your business!
  • No balloon payments mean you take on less risk: With the SBA 504 long-term fixed rate you won’t incur a balloon payment or have to worry about anticipating interest rates changes due to economic volatility. With a conventional loan, it is important to be aware that the rate will generally adjust after 5 or 10 years plus with a balloon option term the bank can choose to renew your loan at the current interest rate or choose not to renew your loan.
  • The only collateral you need is the asset you are acquiring: With the government participation in an SBA 504 loan, the bank assumes less risk so there is no requirement to take additional collateral. A conventional loan has higher risk which is why the bank will often ask you to pledge other assets like your home.
  • Several of the closing costs can be included in the financing so your initial investment can be easier to afford: When you are buying a building and are responsible for your down payment, having closing costs included in the loan package can ease the up-front financial commitment. Possible items that can be included are the appraisal fee, environmental fees and some origination costs.
  • Are you a growing business? Projected income can be part of the consideration process to help get you approved: A nonprofit lender can consider projected income of a business and not completely rely on historical cash flow to justify loan approvals. This is particularly helpful for a rapidly growing business.

How is an SBA 504 loan structured?

There are three partners in an SBA 504 loan—the borrower, a bank or other regulated lender, and a nonprofit mission based lender called a Certified Development Company (CDC) that is guaranteed by the government. This collaboration is designed to help more small businesses get access to capital for purchasing major assets like real estate and large machinery while also mitigating risk for the bank. The borrower benefits by only needing to provide 10% down, getting a lower cost for the funds and a longer term of repayment that supports business stability.

The SBA 504 requires contributions from three participants

  • Bank – provides a first trust deed loan for at least 50% of the total project cost.
  • CDC, nonprofit lender – provides SBA-guaranteed 504 loan for up to 40% of the total project cost, or a maximum of $5 million ($5.5 million for manufacturing businesses and “green” buildings).
  • Small Business Ownercontributes a down payment of at least 10% (15% for start-up businesses or single purpose properties). Businesses with less than 24 months of operation or special use property types may require additional down payment.

SBA 504 pie chart

How much can be financed?

  • The total project cost (bank + CDC + owner contribution) does not have a cap
  • Depending on the bank’s assessment of the project, it can contribute above 50%
  • The CDC contribution is 40% but capped at $5 million no matter what the project size is ($5.5 million for manufacturing and green buildings)
  • The business owner can provide more than 10%

Three scenarios of how each participant could contribute

$2 million total project cost:

  • CDC will contribute $800,000 (40%)
  • Owner a minimum of $200,000 (10%)
  • Bank will contribute $1 million (50%)

$9 million total project cost:

  • CDC will contribute $3.6 million (40%)
  • Owner a minimum of $900,000 (10%)
  • Bank will contribute $4.5 million (50%)

$20 million total project cost:

  • The CDC will contribute $5 million (the maximum allowed for the CDC unless it is manufacturing or a green building then the maximum is $5.5 million).
  • Owner provides a minimum of $2 million – if the bank will only contribute 50%, the owner will need to contribute a total of $5 million.
  • Bank will contribute $10 million or more for select projects.
  • In some cases, the bank is willing to take on more than 50% and then the owner is responsible to make up the difference.

How can I qualify?

Whether a small family owned business or a multi-entity corporation, 99% of all U.S. businesses are considered a small business. Chances are excellent that you are a candidate for an SBA 504 loan. To qualify, your business must be:

  • Owner-operated.
  • For profit.
  • Organized as a sole proprietorship, corporation, partnership or limited-liability corporation (LLC).
  • Showing a tangible net worth no greater than $15 million and average net profit after taxes below $5 million in the last two operating years.
  • The purchased real estate must be majority owner occupied.
  • Your credit history shows you as responsible when it comes to making payments.
  • Have access to the necessary 10% down payment.
  • If you own your building and are looking to expand, you can use your property equity for the 10% investment.
  • Equipment being financed must have a minimum 10-year economic life.

Pre-qualify within 24 hours

Our loan experts will help you identify if an SBA 504 loan is right for your business and can pre-qualify you within 24 hours. Speak to a loan expert today by calling 800-611-5170 or email us at loaninfo@cdcloans.com Want to select a loan expert in your local area? You can choose an experienced loan expert you want to chat with.

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Why CDC Small Business Finance?

  • Work with the SBA 504 experts: CDC Small Business Finance is the nation’s leading provider of SBA 504 loans. With more than 39 years’ of SBA experience, our depth of knowledge helps you navigate the process efficiently and smartly so that you get the financing you need to continue your growth and success.
  • Personalized customer service: Our loan officers work with you one on one to understand your business and vision to guide you through the loan process. They focus on building a relationship with you to make sure you are set up for success both in getting approved for your SBA 504 loan and check in with you after the loan as you invest in your future. Our team of over 11 SBA 504 loan experts throughout California and Arizona share efficiency tactics and process strategies with each other so that you benefit from the whole team’s knowledge which helps streamline your process through approval to funding.
  • Post-Loan Business Advising: You’re not alone. We are by your side as you use your financing to create growth and success for your business. Along with providing loans, CDC Small Business Finance offers knowledgeable and accessible small business advisors to help you with business decisions even after you get your loan. Our proven team of advisors will provide support on everything from business strategy to ways to save money to how to improve internal fiscal controls. As we work with you we offer our support beyond financing and look forward to helping you with future business decisions.
  • Multiple loan options: If you have non-real estate financing needs, CDC Small Business Finance has a portfolio of loan products to support your business. Small business loans are available from $20,000-$500,00 and can be used for purchasing inventory, buying supplies, covering payroll, improving your building, consolidating debt, starting a business and more. If you need money fast, we have our FastFund loan. Submit a simple online application and you’ll know if you are approved within 48 hours and then get your money in just five business days from approval. We have several loan options for every stage of business so please reach out to us with any questions so we can help support your continued success.
  • Up to a $3,000 rebate on loans to purchase commercial real estate with our VetLoan Advantage Program: Veterans who own small businesses can offset loan expenses with our VetLoan Advantage Program. This is our thank you to all veterans for their service, including those just re-entering the workforce. The program provides a cash rebate up to $3,000 for any funded commercial real estate loan for a veteran business owner. Learn more about all of our special terms and discounts for veterans, active military and spouses here Mission: Small Business Finance.

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