This Loan Program From the SBA Can Help Fuel Your Business in 2020
The SBA 504 loan program should be your first consideration for your real estate and equipment growth needs.
Most entrepreneurs typically start their business in a leased facility. And at some point, if things go well, one might face the decision to buy your own real estate or keep paying rent. And if you are in the manufacturing business, a significant part of your capital expense is for equipment.
If you are wrestling with these decisions, you should strongly consider the Small Business Administration's (SBA) 504 loan program. This loan program is designed to give small businesses an additional means of landing financing while simultaneously promoting both job creation and business growth.
As you probably know, I'm a big fan of the SBA and it's various programs. Not enough people are familiar with the flagship 7(a) loan program, and fewer still know about the 504 loan program (it is not as widely used), but you should.
How It Works
The structure and operation for 504 loans are a bit different than their counterpart, the 7(a).
For one thing, the loans are made available through community-based partners of the SBA called Certified Development Companies (CDC). These CDCs are nonprofits that the SBA regulates and certifies. Nationwide, there are more than 260 CDCs, each with a geographic area that it covers.
The 504 loans are structured so that the SBA (through the CDC) provides 40 percent of a project's total costs. A participating lender accounts for 50 percent, while the borrower is required to contribute ten percent of the project's cost.
The participating lender, usually a bank, will hold the first lein position, while the CDC holds the second lein on the 504 loan, which is for 20 or 25 years at a fixed rate.
Does this sound good to you? It should.
Not only do you get 90 percent financing, but there are extended loan amortizations and no balloon payments on the CDC loan. And there's a fixed interest rate.
Those savings should result in better cash flow for your business.
Some Other Detail
There are a few requirements you must meet.
Your business must be for profit (and can't be speculative) and have a tangible net worth not exceeding $15 million, as well as an average net income of $5 million or less after federal income taxes in the previous two years.
The maximum loan amount (for the CDC loan) is $5 million, although some energy-efficient or manufacturing projects may get $5.5 million. Also, loan recipients must create or retain one job for every $65,000 the SBA guarantees - while it's $100,000 for manufacturers.
Do note that there are alternatives to job creation and retention, such as community development goals, public policy goals, or modernizing or upgrading facilities to meet safety, health or environmental requirements. See sba.gov for details about these goals, as well as other particulars related to the loans.
Nothing's ever a sure thing, but the 504 loan program is about as close as it gets in business. Many clients I've worked with have successfully used the program to grow their businesses, and the reviews tend to be superb.
