Small Business Administration 504 loans give clients options
Kurt Chilcott, president and CEO, CDC Small Business Finance
With the recovery in commercial real estate progressing gradually, securing financing for a purchase deal often remains uncertain. Commercial mortgage brokers who know early on that a client is financially qualified may have a leg up on closing the deal.
Commercial mortgage brokers and bankers typically can assess the financial prospects of any clients interested in buying a commercial building, but certified development companies (CDCs) with expertise in Small Business Administration (SBA) financing also can bring experience and a helpful perspective to the table.
Many times, bankers are quick to recommend conventional financing, or in some cases, an SBA 7(a) loan. It’s understandable, as they may make more in fee income from the small-business owner with these products compared to an SBA 504 loan, which is designed for commercial real estate purchases and long-term machinery and equipment. Conventional and SBA 7(a) loans are not always the best products for the small-business client, however. Commercial mortgage brokers looking to finance a purchase deal may want to look more closely at SBA 504 loans.
In brief, an SBA 504 loan package can provide:
- Total financing for as much as $10 million
- 90 percent financing
- Fixed interest rates (which have been less than 6 percent for nearly two years)
- Amortization terms of as many as 20 years
- No balloon payments
Many small-business clients eventually must determine whether buying or leasing their facility is the best business strategy. An SBA 504 loan can make purchasing attractive because the downpayment required by the owner is typically only 10 percent — far less than with standard commercial loans. Many 504 loans are for office, retail or industrial buildings, but these loans can finance virtually any type of business. In addition, there are long-term tax and equity benefits.
SBA 504 loans do have a specific structure, however. CDCs participate with lenders to structure the project accordingly:
- The client provides 10 percent down.
- The CDC (the SBA-guaranteed portion) provides 40 percent of the total project costs.
- The bank or other lender provides 50 percent of the total project costs.
With their expertise in SBA 504 financing, CDCs can assist brokers in many ways, including pre-qualifying clients, educating clients about 504 financing and helping to structure the projects to secure quick SBA approval. In addition, CDCs can query banks that may want to partner on the SBA 504 financing package, or they can work with a client’s lender of choice. Reputable CDCs maintain relationships with a variety of banks and know their credit parameters. CDCs also can help monitor the financing process and ensure the deal closes in a timely manner.
Commercial mortgage brokers who know about the options that the SBA 504 loan can provide can help their clients get deals done.