A strong, well-managed, financially sound small business can be the foundation of generational wealth for a family.  However, family-owned businesses face a lot of challenges. According to SCORE, only 30% of small businesses survive the transition from first to second generation ownership and only 12% of that survive the transition from second to third generation.

The SBA 504 loan program is a great option for family-owned businesses looking to both build on the growth of previous generations and prepare for the next. Learn how the 504 offers a pathway for family-owned businesses to build equity through commercial real estate, expand operations, and improve cash flow.

SBA 504 Basics

The SBA 504 loan program is an economic development initiative administered by the Small Business Administration (SBA). This public-private partnership provides a long-term fixed rate lending solution for small business owners to buy, expand or refinance major fixed assets – such as land, commercial real estate, equipment, and heavy machinery. The 504’s borrower-friendly terms include:

  • Low down payment – up to 90% financing for established businesses, freeing up capital reinvest in the business
  • Below-market interest rates – lower and more affordable monthly mortgage payments
  • Long-term rates 10 (typical for equipment purchases), 20 or 25 year fixed – no surprise balloon payments

Build Equity Through Commercial Real Estate

When it comes to owning or renting a building for business operations, buying commercial real estate builds equity and stabilizes occupancy costs. In many cases, not only is using the SBA 504 loan to purchase commercial real estate an investment for the future, it will lower monthly mortgage payments right away. 

Before working with SomerCor, Ultimate Paint Shop, rented their space for 32 years. The driving force behind their decision to use a 504 loan to purchase the building was the plan for their daughters to take over the business one day. Plus, by owning the building rather than renting, they saved $65,000 a year on their mortgage.

Expand and Upgrade Operations

The 504 program provides affordable financing for fixed assets to increase capacity, efficiency, and expansion into new revenue streams.  SomerCor client, Accord Carton, used an SBA 504 loan to purchase a new machine for a growing  product line primarily sold to the beer industry. As a result, this third generation company built enough new business to support a membership in the Brewers Association and participate in the annual Craft Brewers Conference.

Another great example is Fischer Paper, a third generation manufacturing business. They utilized the 504 program to finance the ground-up construction of a new headquarters. The 162,000 square foot location is state-of-the art, personalized to company specifications, and has plenty of space for future growth.

Improve Cash Flow

For family businesses that already own an office or facility, the SBA 504 REFI may be a great option to improve cash flow – especially during times of ownership transition or economic uncertainty.

In addition to the borrower-friendly terms of the 504 loan, REFI clients can leverage existing equity to take cash out for eligible expenses. The cash out piece ranges up to 20% of the appraised value of the property. Eligible expenses for cash out funds include:

  • Salaries (non-owners)
  • Rent
  • Utilities
  • Inventory
  • Business line of credit and business credit card debts

Download the program flyer and connect with a member of SomerCor’s loan origination team to learn more about how the SBA 504 loan program is a great fit for family businesses.

Margaret Griffin

EVP, Chief Lending Officer

Eric Bacon

SVP, Loan Officer

Darin Gehrke

SVP, Loan Officer

Elisabeth Williams

SVP, Loan Officer