Money IQ: SBA 504 Loans

Money IQ

SBA 504 Loans

The U.S. Government offers a number of business assistance programs through various entities, the most well-known of which is the Small Business Administration (SBA.)

The SBA offers direct, indirect, sponsored and guaranteed loan programs largely through existing lending institutions in your community and throughout the country.

This column is going to focus on just one of the many SBA products, the SBA 504 Loan program. 

For small businesses that are currently paying rent, outgrowing their current space or even needing to downsize, the SBA’s 504 Loan Program could be the solution to their financing needs.

The loan program, which is SBA’s Economic Development Loan Program, is specifically designed to assist small business with the purchase of a building to house their operations.

It allows a small business to purchase a building with as little as 10 percent down and provides a fixed interest rate on 40 percent of the financing package, for a 20 year terms. Equipment loans for 10 year terms are also available through the 504 Loan Program. 

The 504 Loan Program participates with local financial lending institutions that sponsor the Borrower and the respective loan request.

If approved, the representing financial institution would make a 50 percent loan to value first mortgage loan, and the SBA 504 Loan would fund the next 40 percent secured by a second mortgage position. The owner/operator company contributes the remaining 10 percent.

The 504 Loan Program is not industry specific and is available to all small businesses that are for-profit and have a track record of growth and profitability.

There is a minimum project size of $125,000, and while there is not a maximum project size, the SBA 504 Loan Program can participate up to $5 million in any given project. 

These loans are especially helpful for small businesses that currently lease space. Depending on the size and structure of the loan, the payment of the new SBA 504 loan can be measured to your current lease payment for comparison and viability.

The owner, after consultation with their accountant or tax preparer may gain financial benefits of ownership versus tenant lease expenses.

This program also benefits operating companies to expand or right-size their business with as little as 10 percent investment. As with any loan or program, there are application processes and fees associated with this loan. 

Portions of this column were provided by the Enchantment Land Certified Development Company, a local financial institution partner working with New Mexico lenders to promote business lending, jobs creation and owner/operator business models. Certified Development Companies work as agents for the SBA and the lending institution in underwriting, structuring and funding SBA 504 Loans. If you have an interest in this program, visit your commercial banker for more information.   

Editor’s note: Al Hernandez is a Senior Commercial Banker with Los Alamos National Bank and currently runs the Albuquerque market for the bank. Al has over 23 years of banking experience that includes running banks and commercial lending.

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