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How an SBA-Backed 504 Loan Can Refresh Your Business in the New Year

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Now that the new year is upon us, it’s natural for most of us to start thinking about a fresh start. Some might recommit to spending time in the gym or spend more time connecting with extended family. For business owners, the beginning of a new year is an opportunity to evaluate the last twelve months and to look for ways to grow in the quarters to come. If you’re thinking of taking a new path in your business endeavors, one place to start is to evaluate if you have the most effective tools, technologies and property to help you on your way.

Small business owners, specifically, have access to a valuable resource in the form of SBA-backed financing. While the Small Business Administration has a selection of loan and assistance programs to choose from, we are going to take a closer look at the SBA 504 loan. Before we can get to how your business can apply and benefit from this loan, we need a description of just what this loan is in the first place.

What is the SBA 504 Loan?

The SBA describes the 504 loan this way, “The CDC/504 Loan Program provides long-term, fixed-rate financing of up to $5 million for major fixed assets that promote business growth and job creation.” To qualify for the loan, applicants have to show that they’ll use the money to do exactly that – create jobs and grow their business.

“Major fixed assets” primarily include real estate and long-term equipment. However, the loan can be used not just to buy resources for your business. The SBA 504 loan may also be used for construction, renovations, land improvements, and sustainability upgrades. Let’s take a closer look at what else you can do with an SBA-Backed 504 loan.

Buy Existing Land or Buildings

Whether you’re considering buying a property you’ve been leasing or a building you haven’t moved into yet, the 504 loan can help you manage upfront costs. The loan only allows for land and real estate that you’ll occupy with your business. At least 51% of the usable space has to be owner-occupied. Anything beyond that can be leased out, as long as you haven’t used the 504 loan to renovate those spaces.

There are now three loan terms for the SBA 504. You can choose from 10-year, 20-year, and 25-year maturities. The 25-year term is the most recent addition, created by the SBA in 2018. This gives borrowers the option of an extra five years to pay off the loan. While the fixed interest rate varies by the length of the term, all rates are close to 3%. There are no balloon payments due with this loan, so you won’t have to worry about closing out with a big chunk of cash.

Build New Facilities

It’s rarely a simple matter of picking out the building you want and moving your business into it. The market you’re looking at might not have the properties that are right for you, or those properties could be cost-prohibitive due to demand. In these circumstances, it makes more sense to build what you need instead. The SBA 504 loan will cover expenses for new construction projects so you can start the new year off with a whole new building.

The loan can cover much more than the construction of the building itself. Surveys, underwriting, architect fees, certificates, studies, escrow fees, and appraisals may all be included. Be aware that occupation requirements for construction loans are a bit different from a loan used to purchase an existing property. The good news is that you can get $5M or more in financing to go toward your project. Certain types of buildings qualify for more funding, so be sure to ask your broker for details.

Get Long-term Machinery and Equipment

As mentioned earlier, SBA 504 loans cover a wide variety of equipment, so how do you know what qualifies and what doesn’t? The easiest way to know if what you want to buy is allowable is by checking the item’s usable lifespan. To qualify, the equipment needs to have a usable lifespan of 10 years or more.

However, vehicles don’t count on the list of allowed equipment. While you may not be able to finance a new heavy-duty half-ton pickup truck, you could use the 504 loan to bring in an industrial freezer, an MRI scanner, or a textile printer. It will also pay for the installation, calibration, and assembly of the equipment. If you have a unique equipment requirement, your broker can help you find out if it qualifies.

Improve or Modernize

As climate change is increasingly on the agenda of lawmakers, insurance adjusters and in the public eye, there’s a push toward more earth-friendly, self-sustaining and resilient buildings. We’re also seeing a crackdown on less ecologically beneficial materials and updates to building codes, even at the municipal level. Depending on where you are in the country, there could be incentives (i.e. tax breaks, investors, expedited permitting) for improving and modernizing your commercial property.

The SBA 504 loan will allow you to upgrade not only your buildings but their surroundings too. If your landscaping, parking lot, or utility infrastructures like streets and gutters need improvement, you can fund the project with the 504 loan. Not every business is eligible to get financing from this federal program. To find out if your business is one of the many types that qualify for SBA-backed loans, talk with your broker.

How to Apply

There are essentially three parties involved in the SBA 504 loan process; you, a private lender, and a Certified Development Company (CDC). CDCs are local non-profits regulated by the SBA. The 504 loan is 10% borrower equity, 40% in SBA-backed funding through the CDC, and 50% from another lender like a bank. Instead of trying to wrangle all of these resources yourself, a qualified broker can put all of the pieces together for you.

Before you apply, you’ll need to check that you meet the SBA’s base criteria. Since the SBA is a federal program, your business must operate in the United States. You and all major stakeholders have to be current on any federal debt (e.g. student loans, liens, taxes). Annual net income is limited to $5M average per year. The total net worth is limited to $15M in assets.

Even if you’re a pro at navigating complicated application paperwork, you won’t be able to apply for an SBA 504 loan directly through the Small Business Administration. All SBA 504 loans have to be serviced through a CDC. How do you prepare your loan package before you approach a CDC?

This is where having a knowledgeable loan broker is essential. Talk to your broker when you’re ready to take the next steps on borrowing. You can bet your competition is seizing their opportunities to meet the future. Don’t let the chance to renew and refresh your business pass you by when you have the right financing with exceptional rates and terms right at your fingertips.

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