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If you're looking to finance long-term assets like real estate or machinery for your business, the SBA 504 loan program might be your best option in 2024. Even better, there's an exciting update that could save you a lot of money: the SBA is waiving guarantee fees for loans submitted between September 2023 and October 2024. This can result in significant savings for those applying for 504 loans during this period.
Let’s dive into how the SBA 504 loan works, its eligibility requirements, and what makes it such an attractive option for business owners looking to grow.
What Is the SBA 504 Loan?
The SBA 504 loan is a powerful tool for financing major business assets such as real estate and equipment. It’s designed specifically for owner-occupied commercial properties, meaning that at least 51% of the property must be used by your business.
Unlike the more commonly discussed SBA 7A loan, which is often used for business acquisitions, the SBA 504 loan is focused on long-term investments like commercial real estate or heavy machinery. In the case of new construction, you must occupy at least 60% of the building at the start and reach 80% occupancy within a few years.
Key Benefits of the SBA 504 Loan
- Waived Guarantee Fees: Applications submitted between September 2023 and October 2024 could have their guarantee fees waived, resulting in substantial cost savings.
- Low Down Payments: You can finance up to 90% of the total project cost, making this a great option for businesses looking to minimize upfront capital.
- Fixed-Rate Financing: The second loan, or “debenture,” has a fixed rate for 25 years, offering stability against fluctuating interest rates.
How Does the SBA 504 Loan Work?
The SBA 504 loan involves two loans: a conventional first loan from a bank and a second loan guaranteed by the SBA. Here’s how it breaks down:
- First Loan: Typically funded by a conventional bank, this covers around 50% of the total project cost.
- Second Loan: This is the SBA-guaranteed portion, covering up to 40% of the cost. It’s later sold to investors in the secondary market.
- Equity Injection: The borrower is responsible for the remaining 10% of the project cost as equity.
For example, if you're financing a $1 million project, $500,000 would come from a conventional loan, $400,000 from the SBA-guaranteed loan, and $100,000 from your own equity. The SBA allows financing up to $5.5 million for the second loan, though larger projects are possible with more substantial first loans from conventional lenders.
The Importance of Choosing the Right Bank
Not all banks and credit unions are equal when it comes to SBA 504 loans. Each institution has its own lending preferences and risk appetites. Some banks may be reluctant to finance certain types of properties, such as hospitality businesses or special-use facilities like marinas. Others may specialize in these areas, making it essential to find the right lending partner for your project.
Customizing Loan Terms
The terms of the first loan (conventional) can vary from bank to bank. Some offer 30-year amortization, while others may offer 25-year terms. It's also essential to consider whether the loan involves new construction, as this could require a longer interest-only period or specific construction holdbacks.
During the construction phase, the bank funds both the first and second loans, but the SBA-guaranteed second loan doesn’t lock in its rate until the “debenture” stage—typically after the project is completed and a certificate of occupancy is issued. This can expose you to market rate fluctuations if the construction timeline is long.
SBA 504 vs. SBA 7A Loans: Which Is Right for You?
While the SBA 504 loan is excellent for financing real estate and equipment, there are times when the SBA 7A loan may be a better fit. The SBA 7A loan can cover business acquisitions, provide higher leverage, and doesn’t require collateral in some cases.
For instance, if you're planning to purchase a property as part of a “rent replacement” strategy (moving from leasing to owning your business premises), the SBA 7A might allow for 100% financing, whereas the 504 loan typically caps financing at 90% of the total project cost.
Rates and Trends for 2024
One of the most appealing features of the SBA 504 loan is the fixed interest rate on the second loan. Currently, debenture rates are trending down, with the 25-year fixed rate at 6.2% as of early 2024, down from 6.35% in the previous month. However, keep in mind that these rates are locked in only after construction is completed and the debenture stage is reached.
Key Considerations for Construction Projects
For construction deals, both the first and second loans are interim until the project is completed. This means you won’t lock in your final rate on the second loan until the debenture is issued. So, if interest rates rise during the construction period, you could end up with a higher-than-expected rate.
Final Thoughts: Is the SBA 504 Loan Right for You?
The SBA 504 loan is an excellent option for businesses looking to invest in long-term assets like real estate or machinery, especially with waived guarantee fees through October 2024. However, navigating the loan’s dual underwriting process can be complex. It’s essential to work with a knowledgeable financial advisor or lender who can help identify the best terms for your business needs.
If you're ready to explore SBA financing for your next business project, reach out to a financial expert or lender to guide you through the process.