Financing for Ground-Up Construction: Three Reasons to Use the SBA 504 Program

Businesses across every industry are looking for the ideal space that supports operational efficiency, employee retention, and opportunities for growth. When a business owner decides new ground-up construction is the right choice over purchasing an existing property, the SBA 504 loan is a great financing option. 

SomerCor clients that used the SBA 504 loan to build their new headquarters include Alpha Tekniko, Wehrli Custom Fabrication, and Fischer Paper Products. Here are three reasons to use the SBA 504 Program for ground-up construction: borrower-friendly loan terms, the opportunity to buildout the space to best support the business, and the option to include financing for new equipment.

SBA 504 Loan Borrower-Friendly Terms

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

• Low down payment – up to 90% financing for established businesses, freeing up capital reinvest in the business for other expenses;
• 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.

When an SBA 504 loan is used to finance the build-out of a new facility, the business owner builds equity as they pay down the loan. As opposed to paying rent, making monthly mortgage payments helps the business owner acquire full ownership over time. Additionally, owning the real estate provides long-term security and control over overhead, as compared to leasing, even if business fluctuates.

Building equity provides financial stability and gives the business an asset that can be leveraged in the future. This wealth creation is a major advantage of using a 504 loan to build, rather than lease, a space.

Personalize to Maximize

When building a new facility using the SBA 504 loan, business owners have the opportunity to choose the ideal location and personalize the space to their specifications:

• Efficiency – Design to specific business needs and workflows with the optimal facility layout;
• Branding – Construct a building that reflects the company’s identity and values;
• Future-Proofing – Plan ahead with expansion or modification capabilities in mind;
• Compliance and Accessibility – Ensure full compliance with current regulations and accessibility requirements;
• Employee Retention -Create an environment optimized for employee comfort and productivity. Incorporate the latest health and safety features and emerging workplace trends;
• Energy Efficiency – Take advantage of the SBA 504 Green Loan program to finance design and material choices to reduce energy use or offset that consumption through renewable energy.

For all new construction, the business must occupy at least 60 percent of the property to meet the requirements of the SBA 504 Loan.

Finance New Equipment

In addition to expanding capacity through a new building, the SBA 504 loan can support new business lines through heavy equipment purchases.

For example, SomerCor has a client who offers packaging design and manufacturing, automated warehousing, inventory tracking, and shipping for their customers. They used an SBA 504 loan to purchase a new machine to support a growing six-pack carrier product line primarily sold to the beer industry. As a result, they built enough new business to support a membership in the Brewers Association and participate in the annual Craft Brewers Conference.

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 ground-up construction projects.