If you’re considering taking out a Small Business Administration (SBA) loan to help your small business, you may want to explore all the joy and benefits that 504 financing has to offer.
SBA loans are offered through two main programs including SBA 7(a) loans and SBA Section 504 loans. While 7(a) loans can be used for business acquisition, working capital and inventory, the 504 loan program was designed to help business owners purchase a business’s fixed assets, such as real estate, equipment and machinery. Often, acquisitions like these help businesses create new jobs which revitalizes our local economies.
For this reason, SEDCO focuses solely on providing SBA 504 financing - to help our communities grow and thrive. So, let’s take a quick look at the Good, Bad, and Not So Ugly of SBA 504 financing.
The Good
Long-term fixed rates – As of August 2020, the current SBA 504 rate is 2.27% for 25 years. Unlike 7(a) loan rates which typically adjust, a fixed rate means you won’t have any unpleasant payment surprises down the road.
Low money down – Your down payment is typically less than your conventional commercial loan. The minimum down payment is 10% of the total amount being financed. It also covers many fees, like closing costs, that you won’t need to pay up front.
Better chance of qualifying – Because lenders are able to minimize their risk in participating with the SBA in the 504 loan program, lenders are more likely to approve businesses that they might otherwise decline. This makes it easier for small businesses like yours to secure financing!
The Bad
Prepayment penalty – This is a fee that is charged to the borrower if they pay off their loan before the loan term has ended. Currently, the penalty for paying of a loan early is 1.01% of the loan’s value in the first year, but that percentage drops every consecutive year and is eliminated after ten years. Not too scary.
Eligibility requirements – While it’s typically easier for a business to qualify for an SBA loan than other loans, not everyone will qualify. For example, you can still be disqualified because of a low credit score. Also, investors are not eligible for 504 financing – you must be an owner who is involved in running the business.
The Not So Ugly
MYTH: Applying for a loan is a long, tedious process – The SBA has come a long way in the last 20 years and most everything now is done electronically. At SEDCO, we can work remotely with our borrowers, and all forms are sent to SBA electronically for easy submission and decision.
MYTH: Getting loan approval takes forever – SBA’s turnaround time is typically less than a week. We work very closely with our clients to ensure everything is done right and done fast. Quick and easy!
Bottom line, if your small business could use some funding to purchase real estate, equipment, or machinery, a 504 loan just might be your best bet. Plus, at SEDCO, we’re super fun to work with! Contact us to learn more!
Sunshine State Economic Development Corporation (SEDCO) is a not-for-profit certified development corporation (CDC) licensed by the U.S. Small Business Administration to offer the SBA 504 Loan Program throughout the state of Florida. SEDCO can provide your expanding small business with alternative financial resources, sound financial advice, and business acumen. Helping small business succeed is our business. For more information, visit our website or contact us.