SBA 504 Offers Secure Small Business Lending Option for Banks

The SBA 504 program offers banks a secure lending option to help small business clients buy, expand or refinance fixed assets, while at the same time reducing their own credit exposure and increasing liquidity. The unique structure of the 504 operates as a public-private partnership with a Certified Development Company (CDC), in which the bank takes first lien position on the assets being financed. Generally, the bank finances 50% of the project, the CDC provides up to 40%, and the applicant contributes at least 10% of the financing.

The SBA 504 is not a loan of last resort, but a premier Small Business Administrative initiative with a well-established framework and an over 30-year track record of success in the market. In FY23, 296 SBA 504 loans were authorized for $299 million in debentures in Illinois.

During times of economic uncertainty, the 504 program is a proven commercial real estate financing tool. Learn more about how the 504 lowers lending risk, increases liquidity, strengthens existing loan portfolios, and expands potential lending opportunities for banks. 

Lower Lending Risk

• The loan to value (LTV) ratio for the bank loan will not exceed 50%
• 504 loans are collateralized by real estate or other fixed assets
• The bank loan is in the first lien position and the CDC loan is subordinate to the bank’s position
• The CDC loan is backed by a 100% SBA guaranteed debenture
• Charge off rate of .6% over the last 10 years

Expand Credit Box

• The 504  provides credit enhancement to serve customers who otherwise might not qualify
• SBA 504 program helps banks with lower lending limits to expand their small business lending capacity
• Proposed rule to the Community Reinvestment Act would make all 504 loans qualify for CRA credit

Diversify & Strengthen Portfolio

• The 504 is not industry specific providing the opportunity to appeal to clients across a variety of verticals
• For existing customers, the 504 refi is an option to help clients access to equity
• Diversifies portfolio to avoid a concentration of bank specific conventional loans

Increase Liquidity

• Bank typically finances 50% of a 504 project vs 75% of a conventional loan
• Banks can earn fees and interest income on interim/bridge loans related to a 504 project
• Selling 504 first lien loans in the secondary market can help a bank manage its lending limits
• When partnering with a CDC, a non-depository entity, the bank maintains the depositor relationship

Retain & Grow Business Clients

• Provide a full range of financing options with the goal of helping the client and building long term loyalty
• Borrower friendly terms of 504’s fixed long-term finance structure are powerful marketing tools to attract new clients
• A small business that is investing in property and equipment is often entering into its largest business related loan and a 504 loan can be the starting point for an entire banking relationship

Download the program flyer and connect with a member of SomerCor’s loan origination team today to learn more!