Are you a business owner who’s searching for the best financing options for your enterprise? One strong alternative is an SBA (Small Business Administration) 504 loan. Depending on your current needs, it might be the perfect thing to consider for an infusion of capital. While this type of loan seems complex, some knowledge of the basics will help you make the decision to apply. Here are the key things to remember about these kinds of SBA loans.
1. What They Are
SBA 504 loans provide long-term financing for purchasing fixed assets, which might include equipment, machinery, or real estate. In addition to the bank and the borrower, an SBA-approved certified development company (CDC) is involved. Usually, the loan amounts go up to around $5 million. Terms are typically up to twenty-five years, and down payments tend to be 10% of the amount of the loan. The collateral is often the asset(s) that you’re intending to finance.
2. Who They’re For
These loans are for entrepreneurs who are planning to buy or update machinery, real estate, or equipment. The structure of the loan is complex and the money is intended to be used for specific fixed assets — not working capital.
3. How They Work
Think of SBA 504 loans as being in three parts: the down payment (10%), the CDC loan that extends the loan amount by 40%, and the bank loan that extends the loan amount by 50%. If you run a startup or own a special use property, the down payment might be more.
4. Eligibility Requirements
Applications for these types of SBA loans must include proof of a plan for an eligible purpose. That purpose might include:
- Constructing new buildings
- Renovating existing facilities
- Buying existing buildings
- Buying machinery or equipment
- Purchasing land or land improvements
- Debt refinancing associated with the above types of actions
5. How To Apply
Applying for an SBA 504 loan involves finding a lender and working with a CDC. If you have a trusting business relationship with a local bank, try that first. Chances are, it participates in the SBA 504 program. If not, search online to narrow down your choices. Once you’ve found your bank, your loan officer will have a list of recommended CDCs. Or, you can reverse the steps and find your CDC first through the SBA website.
Applying for an SBA 504 loan requires diligence. Keep these points in mind as you make your plan.