If you've ever dreamed of owning a small business, or even if you've already started one, you know that lack of capital can stop a dream dead in its tracks. The good news is that there may be more options for getting that capital than you realize! The even better news is that this year, the federal Small Business Administration (SBA) is expanding those options.
For decades, the SBA's 504 loan program has offered a great deal for eligible small business borrowers: low, fixed interest rates; low down payments; and long loan terms. Historically, the SBA has limited the use of 504 loans to new financing for real estate or equipment. Many borrowers use SBA 504 loans to buy, build or renovate a building or property.
This year brings an exciting development: the SBA will be expanding the program permanently to include refinance of existing real estate debt as an allowable use. That means if you own a small business and have high-interest mortgage debt or other real estate debt, you may be able to use an SBA 504 loan to refinance into a more affordable loan.
Who is eligible for SBA 504 loans?
Most small and medium-sized businesses are eligible for the SBA 504 program. Your business must be a for-profit business with less than $15 million in book net worth, and must have an average net income of $5 million or less over the last two years.
How do SBA 504 loans work?
SBA 504 borrowers typically make a 10% down payment, then a traditional bank finances 50% of the project and the SBA covers the remaining 40%. Every SBA 504 loan also involves a "Certified Development Company (CDC)," which administers the SBA's part of the loan. As it happens, Self-Help is one of the largest CDCs in North Carolina, so we have a lot of experience with these loans.
When will the refinancing option be available?
Congress approved the refinancing provision at the end of 2015. It will likely take 4-6 months for the SBA to update its rules for the program, so we expect the refinancing option to go into effect sometime in mid-2016. In the meantime, traditional SBA 504 loans to finance real estate and equipment are still available. Check out our SBA 504 site for more detail on the current rules for project eligibility.
Why are SBA 504 loans a good deal for borrowers?
- Low down payments (typically 10%): Lower down payments let you preserve more of your money for working capital.
- Low interest rates: rates are typically below market rates. For instance, during 2015 the rate for a 20-year SBA 504 loan was generally between 4.5% - 5.0%.
- Long-term, fixed rates: A longer term means lower monthly payments, while a fixed rate lets you plan for the long haul.
- Fees and "soft" costs (like appraisal and closing costs) included: SBA 504 loans usually allow you to roll many of the project's soft costs and fees into the loan, so you spend less money up front.
A few points to consider:
- Because of the government backing, these loans need to support economic development goals. You may need to show that your project will create jobs or contribute to the local economy.
- The SBA's financing usually includes a prepayment penalty, meaning there could be a fee if you pay the loan off early.
- Because of the program's two-lender structure, you'll need to deal with two separate loans that can have different terms. That can be intimidating, so it is important -- ahem! -- to choose an experienced lender who can help guide you through the process and make it as smooth as possible.
In our SBA 504 lending, we make it easier for borrowers by taking the lead on coordinating with the bank partner and with the SBA. Or if you already have a relationship with a bank, we can work together with you and your bank to ensure an efficient and easy process.
How do I get one?
If your business is in North Carolina, talk to us! Self-Help offers SBA 504 loans for North Carolina businesses. If you've already found a bank you'd like to work with, give us a call; we can work with you and your bank to assess whether an SBA 504 loan is a good option for your project. If you are outside of North Carolina, check out the SBA's search tool to find a CDC in your state.
At Self-Help, we've been making SBA 504 loans for more than 20 years, and in that time, we've seen all kinds of borrowers benefit from the program - from restaurants to manufacturers, from hotels to rock-climbing gyms, from bike shops to breweries and more. If you think an SBA 504 loan might be a good fit for your business, check out our SBA 504 site for more information or to get started.
Here's to knowing your options.