When it comes to SBA 504 loans, you likely have quite a few questions: What are the benefits of a 504 loan, and how can the funds be used? What is the maximum that someone can apply for, and who is eligible?
If you’ve got questions like these, you’re not alone. Luckily, we’ve got answers. The SBA process can be complicated, so let’s start with the basics.
What is an SBA 504 Loan?
This type of loan is a federal funding program that falls under the U.S. Small Business Administration. It’s intended to create jobs and grow businesses.
The SBA certifies and regulates Certified Development Companies (CDCs), coordinating entities in communities that work with nonprofits to bolster economic development. CDCs partner with the SBA to award long-term loans at a fixed rate, amounting to up to $5 million for major fixed assets.
What Are The Benefits of an SBA 504 Loan?
Here are some of the benefits that come with this unique loan program.
- Nearly all small businesses that are past the beginning and planning stages qualify.
- Unlike conventional loans that offer 60 to 70% financing, the 504 program offers up to 90% financing.
- The longer amortization period (up to 25 years, depending on your total project cost) means business owners can pay lower amounts over a longer timeframe.
- Like a fixed interest rate mortgage, there is no large end-of-term payment (also called a “balloon loan”).
- Because SBA 504 rates are also fixed–although variable depending on when the loan is taken out–the interest remains the same and below the current market, whether the terms are 10, 20, or 25 years.
What Can Small Business Owners Do With Their Loans?
Improvement, modernization, business growth, and job creation are all permissible uses of SBA loans. Specific examples include:
- Purchase and construction
- New and existing facilities, buildings, and land
- Machinery and other equipment intended for long-term use
- Extant facilities
- Public or common spaces (parking lots, landscaping, streets, utilities)
Unfortunately, business owners can’t use the funds to refinance or repay existing debt or consolidate debt. Additionally, you can’t use the money for investment in rental real estate or for working inventory or capital.
SBA 504 Loan Eligibility Requirements
To be eligible for an SBA 504 loan, business owners must meet a few criteria.
- You must be a US for-profit company that falls within the SBA’s size guidelines.
- Your tangible net worth cannot exceed $15 million.
- For two years prior to your application, your federal income taxes must show an average net income that does not exceed $5 million.
- You must demonstrate good character and an ability to make payments on your loan, qualified management proficiency, and a feasible business plan.
To get more detailed guidance on SBA loan criteria for your small business, contact the closest CDC.
The SBA 504 Loan Application Process
Unlike traditional bank loans, where you deal directly with financial institutions, the SBA 504 process is slightly different. A CDC will also be involved to ensure you meet the SBA requirements.
You’ll need to apply with a local CDC as well as a lender. Then together with the lender, you’ll apply to the SBA to receive the SBA funds.
How Long Does Approval Take?
Your application approval could take up to six months, depending on how complicated your project or your records are. Once approved, however, you can have your funds in about a month.
Helpful Hints for SBA 504 Loans
Before you get started, here are some suggestions to help you ease into applying.
First of all, this may sound obvious, but before you apply for an SBA 504 loan, make sure you know where and how you want to spend your funds. Because the approval process can be somewhat lengthy, you should verify that a 504 is the best option for the project you have in mind. It may be that something more suited to your business is out there.
Next, take the time to organize your records. This includes tax returns, balance sheets, and records related to company ownership and the owners themselves. There may be additional items that the lender, the CDC, and the SBA will need to see.
Get all of your necessary documents in order at the very beginning to help smooth the process.
SBA Financing and Rates at Wasatch Peaks Credit Union
If you’re a small business owner with a couple of years’ management experience, a 504 loan may be the right option for you.
As a community-based credit union, we know that when small businesses grow and thrive, everyone and everything around them does, too. Our commitment to local businesses throughout Weber, Davis, and Morgan counties make us singularly suited to help make your dream of a vibrant business in a dynamic neighborhood a reality.
We’ve done it for a diverse range of industries and services helmed by community-minded entrepreneurs just like you. When small businesses grow, they create jobs and provide purpose. They give their employees and customers a sense that they are stakeholders in something bigger than themselves while creating close-knit bonds at the same time.
Wasatch Peaks recognizes the pride and commitment that drive small business owners. Our advisors have the experience and knowledge necessary to help you make the right choice for your business.