There is a new member of the SBA 504 loan family. To better meet some borrowers’ needs, a 25-year loan term option is available, which is in addition to the 10-year and 20-year loan options already offered.
SBA’s announcement of a 25-year debenture has been very well-received by the CDC industry. In fact, the industry has long sought a longer maturity option as a way to further meet the needs of its small business borrowers.
Benefits of a 25-Year SBA 504 Loan?
While loan term selection depends on the needs of each individual business, a longer maturity means lower monthly payments and improved cash flow. Managing cash flow is a common struggle amongst many small businesses. The new option will preserve cash on hand, relieving any potential cash flow issues the business may face, while also minimizing the risk of future rate hikes. Plus, the longer amortization, combined with the 504’s low, fixed interest rates, means priority can be given to any other, higher-interest debt repayments that may currently exist.
The new, longer maturity will also make the 504 Loan product more competitive with the SBA 7(a) loan, which already has a 25-year option.
When Will the 25-Year Option Be Available?
Good news! The 25-year maturity option is already in effect. Unfortunately, if your project has already received SBA approval under either a 10-year or 20-year term, you won’t be allowed to switch to the 25-year term. You’d have to cancel your 504 authorization and reapply.
It is estimated the effective interest rate on the 25-year loan will be slightly higher than the 20-year loan. Of course, whether you choose a 10-year, 20-year, or 25-year term, the SBA 504 Loan Program offers the security of knowing the monthly payment will never go up. It’s a perfect time to lock in a long-term, competitively priced interest rate with a monthly payment that won’t change when interest rates rise. Our website will always have the most recent interest rates.
A Quick Overview of How SBA 504 Loans Work
The government-backed 504 loans are one of the best financing options for small businesses. They provide financing for companies that want to purchase land, machinery, equipment, or other capital-intensive assets. The financing typically involves three parties:
- The Bank or Private Lender – the bank lends 50% of the total project costs
- The CDC (i.e. Growth Corp) – these non-profit agencies authorized by SBA to administer the 504 Loan Program lend 40% of the total project costs
- The Borrower – borrowers are typically asked to contribute 10% of the project costs
Primary Benefits of SBA 504 Loans
The 504 has numerous benefits for small business borrowers, but the two primary benefits are:
- Low, fixed interest rates – check out the current interest rates
- Long loan terms – 10, 20, or now, 25 years
Example of Monthly Savings
Say your business needs to expand and you utilize the SBA 504 Loan Program to finance the purchase of your building, which is $1 million. The difference in monthly payments between the 20-year and 25-year would be:
SBA 504 Payment on a $1,000,000 project:
- 25-year: $6,266.22
- 20-year: $6,988.73
That’s a difference of $722.51 per month.
While the 25-year maturity option can shave a significant amount off your monthly payment, be aware that a longer term means you’re borrowing money for a longer period of time, so you will pay more in interest over the life of the loan.
New Maturity Option, Same 504 Guidelines
The 25-year option will still conform to all the familiar guidelines of the traditional SBA 504 Loan Program. It can still be used for the purchase of land or buildings, building improvements or the purchase of equipment and will still feature a fixed rate based on U.S. Treasury bonds, with a down payment as low as 10 percent.
Improved cash flow is of vital interest to all businesses, especially those served by the 504 Loan Program. The longer maturity option is a vehicle that can serve that purpose. If you have questions about 25-year loan debentures, or want to get a better idea of how utilizing this new offering could be beneficial, please contact us.
Growth Corp has been a high-volume 504 loan provider for over 25 years and is an Accredited Lender with SBA.