If you buy a small business owner, property or equipment needed is the SBA 504 loan one of the best ways to finance the purchase. This article discusses the following:
- What is a SBA 504 / CDC loan, and what are the advantages of always
- What you must qualify as a rule for an SBA loan?
- If the interest and other costs to apply in connection with an SBA 504 loan for a SBA 504 loan
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| SBA 504 loans | Commercial Real Estate loan | |
|---|---|---|
| interest rates | 3-4% ( s latest rates) | 5-10% |
Down Payment | 10% (15% for new businesses and individual application characteristics) | 20-30% |
Repayment Term | 10 years equipment, 20 years for real estate (no balloon payments) | 5-10 years, sometimes with a balloon payment at the end |
Collateral | No additional collateral required | May require additional collateral |
| amount you can borrow | Max of approx. $ 13 million | no Max |
| What Qualify Required is | Good credit score (check your free here)? the majority of buildings property if loans for real estate, job creation or political objectives | needs (check your free here) meet good credit score; low debt-to-income ratio; property should be a good cash potential flow |
What is a SBA 504 loan, and what are the advantages?
A 504 SBA loan small business owners allows to buy for the use of their business property or equipment. It can also make renovations or improvements to existing business facilities are used.
There are four main advantages are to get an SBA 504 loan:
- Low interest - Interest Rates There are between 3-4 percent. Click here for the latest SBA loan rates .
- Low deposit - While most traditional commercial loans a 20-30% deposit is required, requires an SBA 504 loan only 10% deposit (which goes up to 15% for single-purpose properties and new businesses)
- Long repayment terms - While most traditional commercial loans are 5-10 years loan, an SBA 504 loan term of 10 years has for the equipment and a 20-year period for real estate
- No collateral -. typically serves as collateral, finances the equipment or property and no additional collateral is required.
SBA 504 loans are suitable for large and small projects. However, most banks prefer SBA 504 loans for projects over $ 500K, because the SBA guarantees to offer the repayment of only a small part of this amount. The maximum amount you can borrow 504 loan with a SBA, is about $ 13 million.
Note: 504 loans SBA are not for capital work. If you need an SBA working capital financing, click here to learn more about SBA 7a loans.
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How to Qualify for a SBA 504 loan
In a way, for a SBA 504 loan qualifying similarly for to qualify a traditional bank loan. You need a good credit score (680 or better - check your free here) to have, can not have many other outstanding debt, and must be able to satisfy the payment. That being said, there are a few requirements unique to the 504 loans:
- you have less than $ 15 million a tangible net worth must and an average net income of less than $ 5 million after tax for the last two years. Most small business owners reading this article is to meet this requirement.
- If the loan will be used to buy equipment, the appliance has a 10-year economic life
- If the loan is is used to buy an existing building, it must be filled at least 51% ownership. For the construction of the building at least 60% must be owner occupied.
- You need to show how the loan will contribute to the creation of new jobs or improve policy objectives.
Let's dig in the last two of these requirements in a little closer. If the SBA 504 loans are for sale to an existing building, the building must be occupied at least 51% of the economy, take out the loan.
For example, a multi-family house purchase may not be suitable for a SBA 504 loan. However, a retail store could buy a two-storey building, in which they used the ground floor and basement, while the upper floor rented. If you are using the loan to buy a new building, it must be at least 60 percent owner lives.
The purpose of the SBA 504 loan program is to promote job creation and economic development. As part of the loan process, you need to explain how your use of the loan proceeds will lead to new jobs or to support policy objectives. At present, the rule that a job must be created or maintained for each $ 65,000 funding. This increases to $ 100,000 for small manufactu insurer.
Instead of creating jobs to meet objectives, you can improve how energy conservation and support minority business development to qualify 504 loans for an SBA by other policy objectives. The SBA website provides a more detailed breakdown of the different policy objectives to meet your project.
Do not forget the typical business loan requirements that you must meet. Most importantly, you will usually need a FICO score above 680 have, for most lenders to take you seriously. (You can check your credit score for free here.) You can not too much outstanding debt. Your debt-service coverage ratio can be calculated by dividing your annual net income of your annual loan and interest payments. Ideally, it should not be lower than 1.25.
If for a SBA 504 loan request
The SBA itself to make any loans. It ensures that only a part of the loan to be repaid, which reduces the risk of the loan for the lender. There are three parties in the preparation of SBA 504 loans involved:
- Bank - makes 50 percent the loan
- Certified Development Company (CDC) - makes 40 percent of the loan. This is the SBA guaranteed portion of the loan and goes up to a maximum of $ 5.5 million depending on what the loan funds used for.
- you, the small business owners - making a 10% down payment (15% of new businesses and homes with limited commercial use, such as a cinema or hotel)
There are 270 CDCs nationwide. To find that will work with you, we recommend that CDC finder tool SBA . To find a bank, your bank try or the CDC might recommend a number of banks, which it has worked in the past. SBA District Offices sometimes compile rankings of the top 504 lenders in the region.
Another option for SBA backed commercial real estate loans, a long-term loan 7a. For these loans we recommend SmartBiz. You have tremendous customer support and receive company finances more quickly than anyone else we know.
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The cost of 504 loans SBA
As mentioned above, a SBA 504 loan is actually two loans , one of a bank and one made by a CDC. The two different loans have different interest rates and costs
CDC part of the loan -. Costs
The interest rates for a SBA 504 loans vary over time because they are US State bound rates, but they are generally in the 3-4% range. Go check our SBA Loan prices Article the latest interest rates on SBA 504 loans.
For a 10-year loan (for devices), is the interest rate equal to the 5 years Treasury rate plus 0.38%. For the 20-year loan (for real estate), it's the 10-year Treasury rate plus 0.48%. There are ongoing fees on the interest payments, which must be paid; The fees amount to approximately 1.7%.
effective interest rate (20 years) = 10 Year Treasury Rate + 0.48% + 1.7%
effective interest rate (10 years) = 5 years Treasury rate + 0.38% + 1.7%
, for example, for a 10 year SBA 504 loan if the 5-year interest rate was 3%, the effective interest rate would be about 5.08%.
The CDC loan is 10 or 20 years, fully amortizing, fixed-rate loan. It works in the same manner as a traditional mortgage works. The borrower pays the same monthly payments for the term of the loan, the loan is paid at what point completely from
bank part of the loan -. Costs
, the interest rate for the bank portion of the loan is offered determined by the Bank. Normally, the interest rate in the neighborhood of 5-10%.
The bank loan is usually 5 or 10 years. In the case of loans, which are for 10 years, set the interest rates usually after 5 years. This means that after 5 years, the interest rate could go down, go up or stay the same. It depends on what the market rates at that time.
The bank is part of the loan and a balloon payment could have be structured. This means that you do not fully paid relatively low monthly payments during the term of the loan, but the loan by the end of the term. At the end you need the balance in a large balloon payment to pay, or, as often is the case, continue to refinance the loan monthly payments.
In addition to the interest, the bank loan and the CDC loan can have the closing costs such as appraisal fees, environmental costs, and architectural and legal fees. Fortunately, this can be included in the financing, so you do not have to make these payments in advance.
Bottom Line
An SBA 504 loans is one of the first types of financing should you think about when you purchase equipment or property for your business , The low interest rates, long repayment terms and low down payment will enable your small business to get more money for working capital. This article gives you the basics on 504 loans SBA.
If you are interested in the long term in the search in a 7a SBA loans for commercial properties contact SmartBiz. You can pre-qualify in a few minutes and you get funded quickly.
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