If you are a small business owner or real estate investor looking for finances for your venture, you may benefit from SBA 504 loan program. Small Business Administration assists small businesses in acquiring long-term loans as startup capital or make capital improvements, buy equipment, or expand to other locations. Read on for more details on how SBA 504 loans work.

How Do SBA Loans Work?

The SBA plays a significant role in assisting business owners in finding money by encouraging liquidity within the lending market. This is made possible by backing third-party lenders. Note that when an entrepreneur opts for an SBA loan, it’s simply taking a loan from a credit union, a bank, or other third-party lenders. The guarantor of the loan is the SBA through terms defined by the program. This way, it’s easier for small business owners to access finances because the federal government acts as a consigner. Also, the lender extends these loans based on their terms but within limits set by the SBA. The small business owner will then repay the lender. 

How Do SBA 504 Loans Work?

The SBA 504 financing program avails long-term, fixed-rate loans designed in a low capital manner for entrepreneurs to purchase new equipment, enabling small business owners to expand their operations without affecting their cash flow.

Small business owners can get loans of up to $5 million and pay back over ten to 25 years or more in some specific scenarios. Note that a borrower cannot utilize the loan for payroll, inventory, debt servicing, overheads, among other general operating expenses. Borrowers can only use the money to purchase fixed business assets such as:

Long-term machinery
Existing buildings
New facilities or renovation
Land or land improvements like landscaping, street improvements, parking lots, and more

The structuring of the SBA 504 loan program varies on a loan-by-loan basis but a specialized loan structure. Up to 50% of the loan comes from the third-party lender. This might be subject to a bank’s credit and collateral requirements since the SBA don’t back it. Approximately 40% comes from Certified Development Company (CDC), which works with SBA to avail funds to small businesses. The remaining 10% or 20% comes from the small business owner.

Bottom Line

The SBA 504 loan program is a lending initiative run through the SBA to help small businesses. Entrepreneurs can grow their businesses or at least maintain their payroll since lenders are willing to offer them the finances they need due to the SBA backing. Contact Sterling Capital Consulting to explore our SBA loan programs.