Benefits of Financing Projects Using the SBA 504 Program

Posted by Rebecca Reinhardt on May 12, 2016 05:00:00 AM

Topic: ALL

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There are many SBA programs available to finance business loans. The programs provide a means to obtain funding when traditional bank financing is not available. The 504 Program is one of the most widely-used and popular ways to finance fixed assets for a business. On December 18, 2015, Congress passed the 2016 Spending Bill which permanently re-instated the SBA 504 Refinance Program. This program is available to both existing and start-up businesses. The 504 Program also provides many benefits for business owners.

The primary benefits of the 504 program are as follows:

  • Competitive long-term fixed rate on SBA loan portion

  • Lower down payment contribution required from borrower

  • Flexible borrowers contribution sources

  • Long-term financing commitment from CDC /SBA and third party lender

  • Expanded debt-refinancing opportunities

One of the key benefits is a long-term fixed rate on the SBA portion of the loan. As of February 2016 those rates were 4.324% for the 20-year term and 4.288% for the 10-year term. These rates are inclusive of all fees and out of pocket expenses. The SBA program offers long-term financing on up to 40% of the project. The SBA portion of the financing can be locked for 10 or 20 years, providing  peace of mind in an environment where rates are expected to rise significantly in the future.

Another benefit of the 504 Program is that it typically requires the business to contribute only a 10% down-payment, based upon of the overall project cost. If the project is specific use, they may require an increased contribution from the borrower. However, this contribution may come from sources other than cash, such as other assets of the owner or the business, proceeds from the seller, municipal loans, or TIF, or equity in the real estate. The options are very flexible.

The bank funds the disbursements for construction of real estate and/or installation of equipment at 90% of project cost.  When the project is complete, the SBA 504 loan funds are disbursed to reduce the bank loan to 50% of project cost. At that point there are two loans and the two loans go into repayment on the elongated amortization.  This structure of interest only during construction also benefits the company with improved cashflow.  As permanent financing for the bank portion is only 50% of project cost, this will typically result in more favorable terms and interest rates on the bank portion of the financing.  It is easy to see how this SBA 504 program is beneficial for the business owner as well as the financial institution.

The final structure of the 504 Refinance Program is expected be released later this year.  It is expected to mirror the program that was available in 2012.

the 2012 guidelines were:

  • The loan refinance must be considered qualified debt. For example, 85% or more of the refinanced loan must have been originally used to finance 504 eligible fixed assets. The refinanced loan must have been closed no less than two years prior to the application date, and the loan must have been current for the past 12 months.

  • Loan amount may be for up to 90% of appraised value, including special purpose property.

  • All traditional 504 eligibility requirements must be met.

  • Small businesses must have existed for two years as of application date.

If your business has equity in fixed assets that could benefit from additional working capital, or an opportunity to restructure and/or retire short-term debt, you may be an excellent candidate for this upcoming program. Or if you are a company that has stayed current on your obligations but could benefit from an extended amortization and/or a fixed rate on a portion of existing debt, this might be what you are looking for.

If you are planning to expand your existing business or are looking to refinance and restructure your current real estate loans, the SBA 504 loan program may be an excellent option.. This should be explored with your lender. It may or may not be the financing tool you need, however the benefits far outweigh the fees involved. The general guideline is if the fixed assets projects with total project cost equal to or greater than $300,000  it may be a financing option worth considering for your business.

To learn more, contact one of our local Commercial Bankers.