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Ag Lending with the SBA 504 Loan Program

by John Reichard on Thursday, May 11, 2017 1:00 PM

For those familiar with SBA 504 financing, the type of borrower that would most likely come to mind that would qualify for a 504 loan would be a manufacturer or a service-related business.  However, SBA 504 loans can be used to finance agricultural enterprises as well.  This blog talks about how an SBA 504 loan can benefit ag lenders as well as farmers.

Since cash is a premium for farmers, the SBA 504 loan is most beneficial to existing farmers who have equity in the land being improved.  This gives the farmer the ability to leverage the equity in the project land as their contribution into the project, preserving cash for their operating needs.  First-time farmers or acquisition of new farmland would require cash for the borrower contribution.  However, if a farmer has equity in land not involved in the project, the participating lender could provide a separate loan to the farmer to “cash-out” the equity to inject into the SBA 504 project.

The benefit for the ag lender in using an SBA 504 loan as part of the financing is the same as for other SBA 504 projects – lowers the lender’s risk in the deal, offers your client creative financing to differentiate yourself in the marketplace, would allow the lender to consider larger projects that would normally be above their lending limit, and there is no reporting compared to SBA 7a lending.

The benefit for the farmer in using an SBA 504 loan includes – financing up to 35% of the project with a long-term loan (20-years), a fixed interest rate for the life of the loan, no balloon payment, the ability to leverage equity in the project property, and a lower cost compared to SBA 7a lending.  It may also be possible to refinance existing farm debt as either the sole purpose of the financing need or as part of an expansion.

Because the SBA considers farmland as “special use”, the SBA 504 loan would be limited to 35% of the eligible project costs involved in the project.  If the loan is for a first-time farmer, then the SBA 504 loan would be limited to 30%.  Also, because of the environmentally-sensitive nature of some farming operations, especially CAFOs, additional environmental studies or reports may be required.

For more information about financing projects in Pennsylvania using the SBA 504 program visit www.sedacogldc.org or contact the SEDA-COG Business Finance Department at 570-524-4491 or finance@seda-cog.org.

Agriculture
Author
John Reichard

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

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