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SBA 504 – Benefits to the Borrower

by John Reichard on Tuesday, April 28, 2015 9:00 AM

Last week I talked about the benefits to the bank of using an SBA 504 loan as part of the financing for a project.  Today we’ll look at the benefits to the borrower of the SBA 504 loan program.

  • Lower cash injection compared to conventional financing – When compared to conventional financing, the borrower may only have to provide as little as 10% of the project costs when using the SBA 504 loan as opposed to at least 20% down when working just with a bank.  This cash savings will help preserve precious working capital for the business rather than tying it up with a long-term asset such as real estate.

  • Fixed interest rate – The SBA 504 loan has a fixed interest rate for the life of the loan.  While in today’s market a bank might be able to offer a slightly lower rate, it is typically only fixed for the first 3 to 5 years of the loan.  With interest rates bound to rise in the future, securing up to 40% of the financing at a long-term fixed rate insulates the borrower from having to worry about what their payment will increase to when rates are re-set.  In fact, because of how the SBA 504 payments are structured with monthly servicing fees built in, the borrower’s monthly payment on the 504 loan will actually go down every five years since those servicing fees get reset based on the balance of the loan at each five-year mark.

  • Lower the risk – If the borrower is having a difficult time acquiring conventional financing for their project, either because they are a start-up, are involved in a specialized industry, or for other credit reasons, involving an SBA 504 loan into the financing mix might lower the risk to the bank enough that they would be willing to provide 50% of the financing needed and get the project financed.  Remember, the SBA 504 loan can’t make a bad deal good, but it can make a good deal better.

  • Long term financing – With the SBA 504 loan able to provide a 20-year loan for real estate projects and a 10-year loan for equipment projects, the borrower can secure up to 40% of the financing on a long-term basis.  With some banks offering a 10-year term with a 20-year amortization, this means that the borrower does not have to worry about a balloon payment during the life of the 504 loan and their ability to refinance the loan.

  • Lower costs – Compared to the SBA 7a Guaranty Loan offered by some banks, the cost to the borrower in financing their project is lower with an SBA 504 loan involved, especially for larger loan amounts.  The fees for 7a Guaranty Loans increase as the loan amount goes higher.  The fees for an SBA 504 loan are a set percentage no matter what the loan amount is.

For borrowers who want to lower their down payment into a project and take advantage of a long-term, fixed interest rate loan with no balloon payments where their monthly payment goes down every five years, the SBA 504 loan is an excellent choice.

Benefits to borrower
John Reichard

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