If you’re looking to expand your property portfolio, you may be on the hunt for a loan or line of credit to help you sign on your next investment deal. The government created the Small Business Administration (SBA) 504 loan program to give smaller businesses a financial leg up and it may just be the right business loan for you. Beau Eckstein, host of the Investor Financing Podcast, recently invited SBA 504 loan expert Carey Hofferber onto his podcast to explain how the loan program works and how you can apply.
What Is the SBA 504 Loan Program?
The SBA 504 loan program is a long-term loan of up to $5 million to smaller businesses with a net worth of less than $15 million, with an intended purpose of investing in your business growth and job creation. It’s known as one of the best high leverage financing loans on the market and banks are also fans of SBA loans, as the SBA guarantees the loan, making it a much less risky investment.
If you’re investing in property, you could use your SBA 504 loan to finance renovations or building improvements, as long as you’re going to occupy at least 51% of the property.
SBA 504 Loan or SBA 7(a) Loan?
The SBA also offers another loan program, the SBA 7(a), which is another potential loan option for real estate investors. The two programs are structured differently, so you need to work out which loan is right for you.
As Carey explains, the SBA 7(a) loan is generally targeted at businesses looking for a smaller loan amount, whereas the 504 loan is for longer-term investments. In terms of interest rates, the 504 typically has a fixed rate, but the 7(a) offers both fixed and variable rates.
Finally, another key difference between these two loan programs is the purpose of the loan. The SBA 504 loan is intended to act as an economic development program and has a job creation criteria, so you may need to provide proof that your SBA 504 loan will lead to your business hiring more employees. On the other hand, if you’re using the loan to increase your business capital or to finance essential maintenance, the SBA 7(a) loan might be better suited to your needs.
Check out this video to see the basic differences between an SBA 504 loan and SBA 7(a) loan:
How Do You Apply for an SBA 504 Loan?
Carey tells Beau that the first thing he asks for from a business applying for an SBA 504 loan is an executive summary, as this gives an overview of the deal.
After that, the general checklist of paperwork you need for an SBA 504 loan includes recent tax returns, a résumé, and a 413 personal financial statement. Once you’ve supplied all the necessary information and got the ball rolling, you could hear back pretty soon. According to Carey, his bank has an average turnaround time of about 5 days for an SBA loan to be theoretically approved.
Can Start-Ups Apply for an SBA 504 Loan?
Yes, the great news is that even businesses with no capital or financial track record can qualify for an SBA 504 loan! As Carey tells Beau, in this case the loan is based on financial projections rather than on actual cash flow.
If you’re a start-up looking to apply for an SBA 504 loan, Carey emphasizes that banks will care most about your feasibility study and business plan. If you need a hand producing your business plan, you can get help from SCORE, a nationwide non-profit providing advice and support to small businesses, and they can put you in contact with a mentor or send you a range of business plan templates.
To find out more about the SBA 504 loan program, you can watch Beau’s full interview with Carey here. Make sure that you’re subscribed to the Investor Financing Podcast to hear more episodes with Beau and his special guests discussing real estate investment, business finances, market updates, and more.
Links and Resources
SCORE Foundation business plan templates