"Your Lending Partner"


SBA 504 – Benefits to the Bank

by John Reichard on Tuesday, April 21, 2015 3:00 PM

Involving an SBA 504 loan into the financing for a project is a partnership between the bank and the CDC providing the 504 loan.  But why is it advantageous for a bank to bring in the SBA 504 loan?  Today we’ll look at the benefits to the bank of the SBA 504 loan program.

  • Reduce collateral risk – With the SBA 504 participating in up to 40% of the financing, the bank’s loan-to-value is reduced to 50% or better.

  • Reduce credit risk – The lower down payment for the borrower (as low as 10%) means that they can keep more of their cash available for working capital, allowing them to weather any storms or to fund their growth while at the same time make their loan payments.

  • Protect your lending limits/Participate in larger deals – Depending on the size of your bank, having the SBA 504 loan provide up to 40% of the financing would give you additional lending capacity within your lending limits for future financing with the borrower.  For smaller banks, only having to finance 50% of the project means that you might be able to participate in larger deals that conventionally would not be possible.

  • Get the deal – If your bank is in a competitive lending area with other banks there is only so far you can cut your rate or fees to get the deal.  By bring in the SBA 504 loan into the financing, you are providing your customer with the benefits of the 504 loan and showing that you are looking out for their best interest.  At the same time, you may be able to achieve better margins on your loan than you would have if you tried to beat out other banks conventionally.

  • Keep your best customers – Along with getting the deal, using the SBA 504 loan can help you keep your best customers.  All banks promote how they care about their customers and want to help them grow.  What better way to show that than by introducing them to the 504 program and the benefits of a low down payment and 20-year fixed rate loan?  The fixed rate portion of the financing offers stability as we prepare for a rising rate environment (in fact, the monthly payment on the 504 loan decreases every five years!).  Remember, the 504 loan is not just meant for difficult projects with tight collateral, cash flow, or other credit gaps.  It can be a great selling tool for your best customers that you want to maintain a banking relationship with.

  • Re-pricing capability – The bank’s interest rate on their permanent loan can adjust with the market.  Whether it’s a variable rate or a short-term fixed rate that gets re-priced, the return to the bank on their loan in the project can be protected when rates rise.

  • Shorter term – If the bank wants to be paid off faster than the SBA 504 loan, they can provide a shorter term (minimum of 10 years when matched with a 20-year 504 loan) and if need be a longer amortization resulting in a balloon payment.  In fact, it’s not uncommon to see a bank loan with a 10-year term and 20-year amortization matched with an SBA 504 loan.

  • Get involved in specialized industries/start-ups – If your bank is hesitant to conventionally finance businesses involved in specialized industries (such as restaurants, hotels, special-purpose facilities or equipment) or start-ups, bringing in the SBA 504 loan can lower your risk and exposure in the project to where you might consider doing part of the deal.

  • Earn extra income for the bank – The bank’s first mortgage loan that is part of an SBA 504 project can be sold on the secondary market, generating additional income for the bank.  In addition, fees and interest income can be earned on the interim loan that covers the SBA 504 loan until it funds.

  • No reporting – As opposed to loans done under the SBA 7a program, the bank does not have to report anything on an ongoing basis to the SBA for their portion of the project that involves the SBA 504 loan.

  • CRA credits – Earn CRA credits for the bank’s portion of the deal involving an SBA 504 loan.

So as you can see, there are many benefits to the bank for including the SBA 504 loan in a financing package.  If your bank’s goals are to increase loan volume and revenue while at the same time look after the best interests of your customers, the SBA 504 loan provides an excellent tool to offer to your current or potential borrowers.

Benefits to bank
John Reichard

Information related to the SBA 504 loan program for small businesses.