Dispelling the myths about SBA 504 Loans is important so that small businesses don’t miss out on an incredible financing opportunity. In Fiscal Year 2023, more than 5,900 SBA 504 Loans were made to businesses nationwide, totaling $6.4 billion. Despite this impressive success, the 504 Loan Program remains under-utilized by lending organizations, possibly because of some erroneous misconceptions still floating around. Dispelling the myths about SBA 504 Loans is what we’re here to do.
The U.S. Small Business Administration’s (SBA) 504 Loan Program is a proven small business lending initiative with numerous benefits. Although sometimes mistaken as a cumbersome loan of last resort, the program’s unique ability to mitigate risk and expand service to small business customers is offering it a well-deserved place in the spotlight.
An Overview of the SBA 504 Loan Program
The SBA 504 Loan Program is an economic development initiative administered by SBA. This public-private partnership provides a long-term, fixed rate lending solution for small business owners looking to buy, expand, or refinance major fixed assets – such as land, commercial real estate, or equipment. The program requires three key players: a small business borrower; a Certified Development Company (CDC); and a lending organization, such as a bank or credit union.
SBA 504 loans are attractive to businesses because they offer a great opportunity for fixing occupancy costs with a long-term, fixed-rate loan and a minimal down payment.
Simultaneously, banks benefit because their risk is cut to a 50 percent loan-to-value ratio with a first lien on the assets financed.
In Fiscal Year 2022, more than 9,200 SBA 504 Loans were made to businesses nationwide, totaling $9.2 billion. Despite this incredible success, the program remains under-utilized by lending organizations, possibly because of some erroneous myths and misconceptions floating around.
MYTH: The Program Competes with Banks
FACT: 504 Loans Require a Partnership Between Banks, CDCs, and Businesses
CDCs work in conjunction (not in competition) with local banks to offer financing through the SBA 504 Loan Program. The structure of this partnership offers lending organizations numerous benefits:
- Ability to offer up to 90% long-term financing with low, fixed interest rates
- Minimizes collateral risk; lending organization gets first lien position with an attractive 50% LTV
- Lending organization makes its own credit decisions with its own loan documentation
- Lending organization sets its rates and fees
- Lending organization can earn fees and interest income on interim loans related to the project
- Manages lending limits and industry exposure
- SBA lending helps fulfill CRA, Rural and Public Policy goals
- Offers a long-term option for financing heavy machinery and equipment
- Attracts new clients with unique marketing opportunities
CDCs are your partner in SBA 504 Loans, not your competitor…you keep your clients!
More than 200 CDCs operate the program nationwide, and each state has at least one. For a complete list, visit the SBA’s website (www.sba.gov).
MYTH: SBA Loans Are Too Cumbersome
FACT: Working with an Experienced CDC Makes the Process Easy
While all Certified Development Companies have the same general mission, there are key differences you should be aware of. These differences can make a huge difference in not only your overall experience during the 504 Loan process, but in whether your project even gets across the finish line. Though your bank may lead the selection of a partner CDC, there are usually options available. Below are some topics to discuss with your bank and any potential CDC.
Expertise and Staff
How knowledgeable is the CDC in terms of structuring SBA 504 Loans? Is their focus on the 504 Loan Program or do they offer a wide array of financing programs? Does the CDC have staff dedicated to ensuring your loan not only gets approved, but also gets closed and serviced properly?
At Growth Corp, we know that when it comes to 504 loans, it’s about much more than just getting an approval. It’s the ease-of-mind that comes from knowing Growth Corp’s team has their finger on the pulse of the process from application to funding and even beyond into long-term servicing. It’s knowing you will be informed every step of the way by the point-person responsible for overseeing the closing of your loan. It’s knowing that, given Growth Corp’s extremely low turn-over, you’ll have the same experienced team members continuing to serve you year-after-year. It’s knowing that Growth Corp has one of the highest first-pass approval rates in the country. What does that mean for you? It means your application is structured correctly and accurately before it’s sent to SBA. This facilitates a quicker approval, a more reliable timeframe, and a more efficient process overall.
Experience, Accreditation, and First-Pass Approval Rates
How many years has the CDC been making SBA 504 Loans? Does the CDC have experience with various industries and business types? Has the CDC worked with a business of your size before? Is the CDC an Accredited Lender (ALP) with SBA? What are the CDCs first-pass approval rates for application packages submitted to SBA’s processing center?
Growth Corp has been focused on SBA 504 Loans for 30 years. Since 1992, we’ve proudly helped thousands of businesses facilitate expansion. In fact, our existing portfolio is over $730 million…particularly impressive considering every dollar is tied to a small business in the Midwest. We know small business. It’s our passion. As the largest 504 Lender in Illinois, we have dedicated ourselves to making the 504 Loan Program as efficient and seamless as possible. In fact, Growth Corp has long held Accredited Lender status with SBA. This means, after a thorough review of our policies, procedures, and prior performance, SBA granted us increased authority to process and close 504 loans, which results in an expedited process for both our borrowers and our lending partners.
Accreditation with SBA, accuracy, and quick turn-around times are just some of the reasons why Growth Corp is a national leader for quality and service.
Relationships with Banks
Does the CDC have a track record of successful partnerships with the banks in your area? Do the banks trust the CDC and its reputation?
During the 30 years Growth Corp has been serving the Midwest, we’ve had the pleasure of working with hundreds of local banks…from Chicago to Carbondale, St. Louis to DeKalb, and everything in between. In fact, it’s because of these ongoing positive partnerships, we’ve been able to get 180 loans approved so far this year, for a total of $148 million.
Does the CDC respond in a timely fashion to both you and your bank lender? Will there continue to be a point-person at the CDC you can call long after your loan is approved? Is the CDC diligent in dealing with SBA on behalf of your loan application?
It goes without saying that everyone prefers to work with people who respond in a timely, respectful fashion. Not only that, but are their answers informative and specific to your project? Growth Corp has a satisfaction rating of nearly 100% in terms of its delivery of service. Your experience with us, and the continued trust of your bank lender, are our highest priority.
MYTH: SBA 504 Is a Loan of Last Resort
FACT: SBA 504 is One of the Best Loan Products on the Market
Many successful business owners…from mom & pop organizations to large manufacturing companies… use SBA loans because of the unique benefits they offer, including:
- Longer repayment terms – up to 25 years
- Low, fixed interest rates
- Lower down payments – typically just 10%
- The ability to include furniture, fixtures, fees, and leasehold improvements
- An option for long-term refinancing of commercial mortgage debt
- Payment stability
- Protection from balloon payments
Most types of businesses are eligible to receive 504 financing. Businesses with a net worth of less than $15 million and a two-year average after tax net income of less than $5 million qualify for the 504 Loan Program. And, with the 504, there is no cap on the amount of the first mortgage loan provided by the lender. The cap on the 504 second mortgage is a generous $5 million ($5.5 million for manufacturing and green-energy projects).
MYTH: SBA 504 Loans Take Too Long
FACT: SBA Lending Has Come a Long Way
SBA lending has come a long way in the last 10 years and most everything now is done electronically. Turnaround times are typically less than a week once a complete application is received by SBA. Furthermore, a new feature called ALP Express is further expediting the process. This program provides delegated authority for Accredited CDCs to expedite the approval, closing, and servicing of 504 loans of $500,000 or less that meet the ALP Express eligibility requirements.
Plus, working with a CDC saves you valuable time because they package and process loan applications through the SBA, and then close and service those loans as a second mortgage once they have been approved. You as the lender will generally process your portion of the loan as you would any other…and you get to keep an ongoing relationship with your client through your first mortgage. Unlike the SBA 7(a) Loan Program, the 504 Loan Program does not require your bank to become an SBA-certified lender or have any previous experience with SBA lending.
MYTH: SBA is a Direct Lender
FACT: 504 Loans do not actually come directly from the SBA
The SBA 504 Loan Program is funded through the sale of debentures that are fully guaranteed by SBA. Private investors that are looking for fixed income streams, guaranteed with the full faith and credit of the government, find this investment attractive. The source of program funding is entirely private. The Federal Government is a guarantor only. Program fees charged to the Program’s participants reimburse the Federal Government for any subsidy expense associated with the guaranty. This is a no cost program for the Federal Government and taxpayers.
The source of loan funds under the SBA 504 Loan Program is important to the Program’s existence. Most programs requiring continuing Federal subsidy suffer budgetary risks. The SBA 504 program is not such a program. Given that the source of funding for the program is private and that any Federal subsidy expense is reimbursed by the program participants, there has been little difficulty in raising support in Congress for this well accomplished economic development program. In fact, the program has been operating successfully for over 35 years, with an extremely low default rate and a highly valued performance record.
Since 1986*, $126 billion in 504 loans have assisted roughly 210,000 businesses nationwide, creating 3.2 million jobs.
Overall, 504 loans benefit banks in numerous ways; including risk and liquidity management, fee and interest income, and customer retention. Given the current economic conditions, the 504 should not be seen as a loan of last resort, but as a great counter to increased margin spreads on conventional loans. Its well-established framework and long track record of success makes it a powerful tool for your bank.
Want to Learn More?
Keep in mind, we work in conjunction with local banks…not in competition with them.
Why Growth Corp? We know small business. It’s our passion. We are proud to have helped thousands of businesses facilitate expansion. As the largest 504 Lender in Illinois, we have dedicated ourselves to making the 504 Loan Program as efficient and seamless as possible. If you want to learn more, we would be happy to meet with you. Just give us a call at 877-BEST 504 or contact any member of our Lending Team.
Data source: U.S. Small Business Administration · *1986 numbers are estimated based on available data.