While the U.S. Small Business Administration (SBA) and its loan programs have always played a crucial role in the advancement of small businesses, one of their key players, the 504 Loan Program, is playing an important role in helping businesses grow, strengthen and recover.
The 504 Loan Program was designed to serve as an economic development tool by providing businesses with access to quality, affordable capital while simultaneously encouraging job creation. The program is so named because it was originally created by Section 504 of the Small Business Investment Act of 1958.
This unique financing option provides small businesses with long-term, fixed rate financing, which is most frequently used to buy, build or refinance fixed assets, usually buildings or equipment. Nationwide, in fiscal year 2020, 504 lending saw double-digit increases, fueling $5.8 billion in new capital investments for 7,000 businesses throughout the United States. But why, during a pandemic, would 504 lending see double digit growth? Because the terms are unlike anything else in the market.
Access to cash
With the 504's refinancing option, borrowers can leverage their building's equity and elect to take money out for eligible business expenses, such as salaries, inventory, credit cards, etc. This is a great way to restructure, and possibly consolidate, existing debt while also accessing an infusion of cash that may be trapped in your building.
Lower monthly payments
In addition to helping businesses with immediate access to cash, 504 loans increase the availability of working capital going forward. The program's long repayment periods lower monthly mortgage payments by spreading out the amortization for up to 25 years. Plus, borrowers can save thousands by locking in today's below-market fixed rates. In fact, the 504's fixed effective rates have remained well under 3% for much of 2020.
Less money down
The structure of 504 loans is unique, offering lower down payments than most conventional loans ... typically just 10 percent. (Startup businesses and single-purpose facilities require a slightly higher equity contribution.) Essentially, there are three parties involved -- your business banker (50%), a Certified Development Company (CDC), such as Growth Corp (40%), and the borrower (10%). With this structure as much as 90% of the total project is financed from sources outside of your own pocket.
Predictable overhead costs
Budgeting and long-term planning become easier with predictable, fixed monthly expenses and no future balloon payments to worry about.
Most businesses qualify
Most for-profit businesses are eligible to receive 504 financing, so long as they average less than $5 million in annual after-tax profits and $15 million in net worth. Additionally, most national, regional, and community banks participate in the program so you can likely stay with the lender you already use for your business banking.
Whether you're looking to access cash, control overhead expenses, or expand to meet increased demand, the 504 has you covered and can help pave the way forward. Learn more about the 504 Loan Program at www.growthcorp.com/sba504.
• Sara Vanhala is director of marketing & communications for Growth Corp.