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SBA 504 Loans: An Ultimate Guide

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The global health crisis of 2020 changed everyone’s life in significant ways. But, one way it hit us is in the area of small businesses. 1.8% of all small businesses report they will never reopen after the global health crisis.

On the surface, this may not seem like much, but in reality, it is a lot of local businesses. Local small businesses have struggled to compete ever since the Great Depression almost a hundred years ago.

But, there is hope. Thanks to the government’s creation of the SBA 504 loans program permit, small businesses stand a chance.

Whether a loan is right for your business is a hard and personal question. But,  we are here to help you understand your options better. Keep reading” SBA 504 Loans: Ultimate Guide” to learn more about your investment options!


What Is an SBA Loan? 

An SBA loan stands for “small business association loan”. These are unique types of small business loans since they are not private loans. Rather, SBA loans are backed and guaranteed by the United States government.

The term SBA is a generic term for several different kinds of SBA loans. Our focus today is on SBA 504 loans, but for clarity, we will also touch on other types briefly as well.

The loans serve a vital purpose to small business owners. They provide funding for large purchases such as real estate or equipment. They are long-term loans and usually span between 15-30 years.

We will discuss regular small business loans (also known as conventional business loans). Understanding the distinctions between an SBA and a conventional loan will help you understand the pros and cons of both. But, for now, the general difference to understand is the debtor guarantees one. The other the government guarantees. More specifically, a CDC.

This helps small business owners develop some free equity over time. In other words, if a business owner wants to expand their business into a new building or area. Maybe you wish to maybe move your business from a small town to a big city? But you lack the available funds to purchase this outright.

SBA loans exist to help amend this issue. They provide ready revenue for you to use in your purchases so you do not tie up your own revenue. By doing so, these loans enable small businesses to compete with larger businesses as well.


What Is a Conventional Loan?

A conventional loan is another relatively generic term used to 4efer to several types of loans. But, as a general definition, a conventional loan is a private loan.

A private loan is not guaranteed. It is not secured to a certain percent by the United States government like the SBA is. The entire dependency is reliant upon the debtor to secure the loan.

The debtor secures or guarantees private loans through their assets. These assets include things like their real estate and their other collateral.

Typically they require higher credit scores. Denial is much more common and if you default repayment falls on you. Additionally, they tend to have higher earnings requirements for their applicants.

Even though many loan websites claim they require a credit score of 620, they typically don’t accept this. You usually need to have a credit score a good 50-60 points higher at least to qualify.

The benefits of these loans are they are versatile. Businesses and private citizens can apply for these loans. They help people fund large purchases across the board. For example, if you want to increase your inventory, an SBA loan may not qualify for you.

SBA loans tend to be for real estate and machinery purchases. They won’t be able to help you expand your business in other ways. But, conventional loans come with a much heavier burden on the debtor. Just make sure you get sound financial advising prior to your purchase or signing of a loan.

When and Why Were These Loans Created? 

SBA began as the RFC (Reconstruction Finance Corporation) in 1932. This organization began as Herbert Hoover’s attempt to alleviate the struggles of the Great Depression. His goal was to prevent small businesses from going under during that trying time.

Later, under Franklin Roosevelt’s administration, the RFC became something bigger. During World War II, small businesses really struggled to compete with large businesses. Because of the war, big businesses were thriving under the massive production needed to support the war efforts.

However, small businesses were significantly hit hard during this time. Bug businesses were able to bolster and boost their production during this time. They could then capitalize on the high demands from the people and government.

During this time everyone struggled to have enough. Factories were destroyed in Europe constantly. This put a very heavy burden on American manufacturing to produce the goods needed. For these reasons, big businesses were able to maximize their profits. Small businesses did not have these resources though.

They did not have the funds and collateral to update their manufacturing facilities. Therefore, the SBA became the hopeful answer to these struggles. It was originally known as the Smaller War Plants Corporation (SWPC). Later, it became part of the United States Department of commerce.

During the Korean war the office became the main provider of review and approval of small businesses. The loan department was better established, and the SBA became the leader in this branch of the operation.


How Do They Work? 

One of the best ways to think of an SBA loan is as an advocate for small businesses. Small businesses are unable to attain the loans available to bug businesses. And, as a lender, this is reasonable.

A lender wants to get their money back plus make money on the loan. If they see a small business without much revenue or collateral, they are hesitant. And, you cannot really blame lenders for these concerns. Without a solid guarantee, they can stand to lose a lot of money if the loan is defaulted on.

But, under an SBA loan, the government backs the loan. The government guarantees a certain percentage of the loan to the lenders. With this system in place, lenders are less hesitant to lend money to a small business.

We will deep dive into the how-to apply and the specific requirements for an SBA 504 loan. But here is the general way these loans work.

The applicant must submit their financial information for their business to the lenders for approval. This includes:

  • Yearly revenue
  • Debt information
  • Cannot have a bankruptcy on record
  • Make monthly payments
  • Loans last typically 2 decades
  • Low-interest rates

The structure of this loan is important. The low-interest rate is a design feature that intends to increase availability. Many times small businesses have to pay higher interest rates on their loans. But, this loan allows a lower interest rate since the risk is lower for the lender.

What Is an SBA 504 Loan? 

SBA 504 are small business loans geared to real estate purchases and other massive purchases. The name of the loan comes from the legislative section of the bill where they establish this loan. The code is section 697a of the United States title 15 of the various trade laws governing the U.S.

This code establishes everything trade-related. Everything from weights and scale rules to regulation of prices. The SBA 504 section of this legislation spells out the monetary limits of the loans and yearly limits.

The purpose of this loan is to give small businesses a chance to make significantly larger purchases. Just remember your yearly revenue is revenue after taxes. Some of the purchases backed by this loan include:

  • Real estate (land or building)
  • Building improvement
  • Installation of parking lots
  • Roadway improvement
  • Replacing roofs
  • Windows
  • Sewage dispensary (plumbing)

These assets are known as fixed assets. A fixed asset is essentially a piece of real property with real value. The costs of the asset are balanced against the value of the asset. Hard products such as land and buildings have an established value.

This value can depreciate over time. But, the value of the product is known and established. The difference would be a soft asset. A soft asset is an expense that has no true value. This can include things such as legal fees and closing costs on the property.

Can You Include Soft Asset Costs in an SBA 504 Loan?

Generally, you cannot use an SBA 504 loan to cover the costs or fund costs for soft assets. Let’s say you are being sued and want an SBA 504 loan to cover this expense. Unfortunately, this loan does not cover these sorts of expenses. These costs are not a solid value.

A soft asset is defined as an expense that is temporary. Without a year term or value exceeding a temporary time, there is nothing to back up the loan. However, this does not mean a soft asset cannot be factored into the loan.

The question is whether the expense is a result of the asset purchase? What does this mean? This means costs that you incur in closing costs or legal fees from the real estate purchase. These costs can be factored into the loan costs and the loan can cover the expenses.

What Is a CDC for the SBA 504 Loan?

A CDC is not the center for disease control. Rather, in the financial world, this word refers to a non-profit that funds economic development. The acronym stands for a “certified development company”.

These companies are non-profit organizations approved by the government for economic development. These organizations operate by assisting in the development and funding of development.

These CDCs fund portions of the loan to take the weight off of the shoulders of the lender. Typically, these non-profits cover approximately 40% of the loan. The structure of the loan exists as follows:

  • The bank covers 50% of the cost
  • The CDC covers 40% of the costs
  • The Debtor is responsible for 10% of the costs

At the end of the day, this design seriously diminishes the responsibility of the lender. It provides them with a level of assurance that they won’t suffer a huge loss for the loan. CDCs serve a vital function within their communities.

In order to obtain approval, they undergo strenuous approval measures. But, primarily their goal is to assist the community in their economic and financial security. These organizations have been around since before the 1960s and have helped many small businesses compete. And, perhaps more importantly, stay relevant on the market scene.

What Are the Requirements for an SBA 504 Loan?

SBA 504 loan requirements include several monetary criteria to qualify. But, the specific monetary requirements will be discussed in the next two sections.

Generally, to qualify for an SBA 504 loan your business must be for profit. Non-profit organizations or businesses are not eligible for his loan. You must qualify as a small business.

In other words, they do not want any big businesses masquerading as small businesses. To find out if you qualify as a small business you can check the United States SBA website for clarity on the topic.

The government specifies that only businesses under certain brackets qualify. These brackets include how many employees you have to how much revenue you make. All of this information needs to be submitted for approval for the SBA 504 loan program.

The United States government also provides a useful tool to scale your business. You can use this tool to find out if you are likely to qualify as a small business before you start your application.

Do You Need a Certain Credit Score? 

Unlike a conventional loan, an SBA 504 loan does not have a spelled-out credit score. You can apply for an SBA 504 loan regardless of your credit score. But, having a good credit score will likely increase your potential for acceptance.

This does not mean you won’t qualify for the loan, however. One of the best ways to figure out if you qualify is to speak with an agent. Explain why the company’s credit score is the way it is. There may be ways to work with companies with lower credit scores, so long as the situation is understood.

Many people wonder if they can qualify for an SBA loan if they have prior bankruptcies. This is a trickier question. If you are in the midst of bankruptcy (regardless of the schedule) you won’t qualify.

However, if you were discharged from bankruptcy you may qualify. This is up to the discretion of the lender and CDC. But, generally, if the bankruptcy was discharged a few years prior, you are okay. the goal of the SBA loan is to help small businesses compete.

If you filed for bankruptcy you may still qualify after discharge. This is heavily dependent upon why you filed and your current business position.

Do You Need a Certain Amount of Revenue? 

The amount of revenue you make is looked at. But, it is not the determining factor of whether or not you will qualify. Revenue is assessed to help determine if a loan is going to benefit your company.

You can also be disqualified if your company generates over a certain amount each year. Normally this amount is set to about $15 million dollars in a year.

A CDC may be more likely to provide funding for a successful business. But, do not be discouraged from applying just because you believe your revenue is too low. Remember your business is an important part of the local community’s economy. This is what the CDCs look for.

How Long Should Your Company Be Incorporated? 

Your business should be incorporated for a minimum of 2 years if you hope for approval. There is not an exact time frame established for approval, however. There are some specifications about how much you generate in the two years prior to applying.

If you apply for an SBA 504 loan you should only generate less than $5 million in two years. This is $5 million or less for the two years prior to your application per year. So, not $5 million combined over two years. This is $5 million or less every year for two years.

Green Energy Program

There are some distinctions to these requirements under the Green Energy Program. The Green energy program finances specific investments geared to environmental improvements.

In general, the Green energy program seeks to improve businesses’ energy efficiency. This includes things like solar panels. But, the loan is not just for the cost of the solar panels. Oftentimes, you can get the installation and other costs covered under this loan.

What Are the Benefits of this Loan?

There are several benefits to the SBA 504 loan. Some of the most obvious include the rate of acceptance and interest rates. The rate of acceptance is significant for many small businesses unable to attain funding.

Being able to obtain financing opportunities for your business is a game-changer. It is very difficult to move forward with a business if a huge payment is impossible for you.

Many loans deny small businesses or offer higher interest rates, making competition hard. Fortunately, with an SBA 504 loan, you can purchase new office space or land to expand your business.

The Small Business Burea estimates that one in four small businesses lack adequate funding. Without this funding, the businesses cannot expand. They cannot compete. They cannot become a more expansive service.

Many small businesses resort to using their own credit cards. They are unaware of many of the opportunities available for funding. These are not the types of statistics that lead to economic growth. But, the SBA 504 loan is working to make amends for these statistics.

Interest Rates

One major benefit of an SBA 504 loan is the interest rates. Typically these rates are based on similar formulas as conventional loans. However, one major distinction is the length of the loan.

Typically a conventional loan is only good at a fixed rate for five to ten years. After this period of time, you must pay the remaining balance. Or, the loan will be subject to reevaluation and the rate raised for the next ten-year period.

An SBA 504 loan is good for almost double the time of a conventional loan. The rates are fixed and do not change. This helps you plan your finances and rest secure in your monthly payments.

More Cash Flow

By using an SBA loan helps free up your money for the here and now. As a small business owner, this is a big deal. Basically, you can still afford your rent and payroll while improving your business.

And, banks are more likely to loan you the money. Because of the assurance from the CDC, you can make purchases beyond your original capacity. Banks do not usually loan money if there is no way to guarantee the money.

So, with this loan, you can afford your bills today without the worry of delaying investments. You need to have the liquidity of your money so you do not lose valuable staff members or your primary location.

Lower Amount of Initial Investment

Under the SBA 504 loan, you only need to invest up to 10% of the cost upfront. Everything else is covered by the loan from the bank and CDC. This means you will only need to front a small amount of cash.

Monthly payments are also very low thanks to the long time period before repayment. The time frame breaks up what is a large sum of money into very small monthly installments.

You can purchase millions of dollars worth of hard assets with this loan. This makes a huge difference for anyone looking to make major renovations. Or, drastically alter their business’ function.

How to Apply for an SBA Loan?

To apply for an SBA 504 loan you need to have the agreement of any partners. This means they will need to complete the form applying for the loan with you. It requires information regarding your company’s structure. Are you a sole proprietorship or an LLC?

Are your partners equally part of the company? Do they invest money into the business? Whether the partners need to partake in the application de[pends on the company structure and their investment in it.

There are also financial data you need to complete as well. These include tax information and revenue. The form is available on the SBA’s website for download.

SBA 504 Loans and Your Company

Deciding whether to take out a loan or not is a big decision. Understanding the costs and benefits to your company is crucial to the success of the investment. This article intends to inform the reader about all the potential benefits and costs.

SBA 504 loans exist for any small business hoping to grow. Maybe you want a better location? Maybe you need better equipment? Our SBA 504 Loan Ultimate Guide hopefully answered your questions. If you like to learn more about other SBA loans such as SBA Micro Loans or SBA 7A Loans, See our other article links below.

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