If you are a business owner thinking about purchasing or constructing a building from which to operate your business, consider an SBA 504 loan. The 504 loan is one of many loan programs offered through the U.S. Small Business Administration (SBA). The SBA is an independent agency of the federal government whose mission is to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. The 504 loan contributes to this mission by helping owners of healthy businesses save money, which the owners can then inject back into their business or into the open market. The primary attributes are:
Lower Down Payment: The typical down payment on an SBA 504 is 10% of the project cost vs. the traditional down payment of 25% of the purchase price or appraised value. Project costs include the land, the building, hard and soft construction costs (including tenant improvement renovations), furniture, fixtures, equipment, and closing costs.
Competitive Rates and Terms: Because of the way an SBA 504 is structured there is less risk to the lender, which equates directly to the interest rate of the loan. Typically a lender will finance 50% of the project cost and the SBA will finance the additional 40% with a government-guaranteed bond. Because the lender has less risk (only 50%) they can offer more competitive interest rates. The SBA interest rate is fixed for the entire 20-year term eliminating any interest rate expense exposure to the borrower on the SBA’s portion of the loan.
Control of Cash Flow: With only a 10% down payment and lower interest rates, the business owner has more working capital available to manage cash flow. Positive cash flow is a key component to operating a successful business. Freeing up available cash for short-term use instead of tying it up in a long-term asset, like real estate, is invaluable for most small business owners.
Finance Non-Traditional Properties: Owner occupied, single-use or special-use properties such as gas stations, hotels/motels, restaurants, and car washes are eligible for SBA financing. In many cases SBA financing is the only way to purchase these properties.
Assumable Loans: This is important because it helps define a business owner’s exit strategy. When a business owner is ready to retire or sell their business they will have an additional asset (the property) they can either sell as part of the business, separate from the business, or simply keep as an investment property. If they decide to sell the building a low-rate, assumable SBA loan may be a great negotiating point.
Next to actually buying a property for their business, I believe an SBA 504 is a smart option for a business owner seeking a commercial real estate loan. The small business owner can significantly reduce real estate expenses while at the same time recognizing the highest cash-on-cash returns possible in commercial real estate financing. There is not another solution that allows for better use of the owner’s hard-earned capital while retaining the wealth building benefits of owning real estate.
Call me:
Chris Cappeto
(707) 888-4402
eMail me:
chris@baltimore-financial.com
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