As you’ve probably heard, interest rates are on the rise. And rising interest rates can have a serious effect on small businesses…impacting everything from growth plans to cash flow. Therefore, if you’re a small business owner with either a variable rate loan or plans for expansion, now is the time to prepare while rates are still low. Here are a few things to keep in mind:
Interest Rates and Loan Terms
Conventional loan rates are typically only fixed for a certain period of time, usually 3-10 years. After that, the rate is reset and could become variable. In a rising rate environment, that means you could find yourself with a much higher rate in the future. Conversely, a long-term fixed-rate mortgage, such as the SBA 504, locks in today’s low interest rates and eliminates concern over future interest rate hikes. The interest rate for SBA 504 loans has averaged a low 4.33% this fiscal year. By locking in this low rate, which is fully amortized over 20 years, you’ll see predictable and lower monthly payments.
Down Payment Requirements
For businesses looking to protect their cash flow, or facing tighter cash flow because of higher interest rates, the SBA 504 offers another advantage. Down payments as low as ten percent. This amounts to huge cash savings as most conventional loans require 20%, or even up to 35%, down.
Balloon Payments and Call Provisions
A balloon loan mortgage, common in commercial real estate, is usually a short mortgage that requires a large one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due, but you will either owe a lump sum at the end or be required to refinance the balance. This can lead to another round of building appraisals and credit approvals to endure. However, unlike conventional commercial real estate loans, a 504 Loan has no balloon payments.
Call provisions are similar to balloon payments in that, with a conventional loan, you may be required to maintain a specific debt-service coverage ratio as a way for lenders to lower their risk. If you fail to meet that provision, the bank can “call in” your loan. This means you would either have to pay off the balance, or refinance it. The SBA 504 Loan Program has no covenants or call provisions either. What you get is a long-term, fixed rate loan offering secure, predictable monthly payments for the life of the loan.
Closing Costs, Soft Costs and Other Fees
All loans come with closing costs, which include appraisals, loan origination fees, etc. These expenses can add up quickly. Conventional financing typically requires all closing costs to be paid upfront, but SBA 504 loans allow you to roll them into the loan, thus preserving your cash. Not to mention, if you are expanding your business, the cost of equipment, furniture and fixtures, parking lots, architectural fees, etc. can also be rolled into the loan, saving you even more.
Despite rising interest rates, SBA 504 loans are still attractive to borrowers because they offer a great opportunity for fixing occupancy costs with a long-term, fixed rate loan and a minimal down payment. Many borrowers are seeing the upside to buying their own properties, or refinancing variable loans into long-term fixed rate loans, while interest rates are still low.