Busting Five Myths About the SBA 504 Program
The SBA 504 loan program is the premier economic development loan program administered by the Small Business Administration (SBA). The 504 loan provides a long-term fixed rate lending solution for small business owners to buy, expand or refinance major fixed assets – like land, commercial real estate, and equipment.
Despite decades of impactful lending – totaling over $400 billion in small business investment – some business owners have misconceptions about the program. Here are five myths about the SBA 504 program and the corresponding reality about the benefits for both borrowers and lenders.
MYTH: The loan process is too long and cumbersome.
FACT: Typically the documents required to apply for an SBA 504 loan are the same ones needed for a conventional loan. Additionally, certified development companies (CDC), like SomerCor, are subject matter experts on the process. Our team is your bridge to the SBA. As a top performing CDC nationwide with Accredited Lender (ALP) status, SomerCor staff has the expertise and experience to efficiently navigate the process from application to servicing.
MYTH: It is a loan of last resort.
FACT: The SBA 504 loan is a great option for business owners to consider whenever they are seeking to purchase fixed assets. It is not limited to those unable to secure a conventional loan. The program has borrower-friendly terms to support its economic development policy goals:
- Lower down payment – up to 90% financing for established businesses
- Below-market interest rates – lower and more affordable monthly mortgage payments
- Long term fixed rates 10, 20 or 25 year – no surprise balloon payments
The program has a great track record – with a low default rate of .5% over the last 10 years. Additionally, the SBA 504 program is a “zero-subsidy” government program. This means taxpayer dollars do not directly fund these loans. Instead, the 504 program is funded through the sale of CDC debentures, fully guaranteed by the SBA, to private investors. The federal government acts as a guarantor only. Program fees charged to participating lenders and borrowers offset expenses associated with the guaranty.
MYTH: The loan program competes with traditional lenders.
FACT: The SBA 504 loan is a public-private partnership, requiring three players: a small business borrower, a CDC, and a third party lender (i.e. bank or credit union). CDCs, like SomerCor, are nonprofit entities, certified and regulated by the SBA, to originate and service SBA 504 loans. The 504 loan program can’t happen without lending partners.
For traditional lenders, the SBA 504 program offers a secure lending option to help business owners buy, expand or refinance fixed assets. The unique structure of the 504 dictates the lender is in first lien position on the assets being financed. Generally, the lender finances 50% of the project, the CDC provides up to 40%, and the borrower contributes at least 10% of the financing.
Effectively, a lender is able to outsource the entire SBA loan process to the CDC while making a conventional senior mortgage loan at a 50% LTV. The 504 program enables lenders to participate in strong small and mid-size business loans, diversify loan portfolios, mitigate lending risk, expand their credit box, and earn Community Reinvestment Act credit.
MYTH: The loan program is limited to “Mom & Pops” and startups.
FACT: While these type of businesses can access SBA 504 financing, the majority of SBA 504 loans are for larger, more established businesses. This includes familiar local brands like Eli’s Cheesecake, Revolution Brewing, and Garrett’s Popcorn – companies that all partnered with SomerCor on an SBA 504 loan.
Businesses with up to $20 million in tangible net worth and up to $6.5 million in average net income after taxes can qualify. This size standard, along with additional updates to the program rules by the SBA, offer more flexibility for mid-size businesses. Ownership in other businesses no longer affects eligibility if they’re unrelated and have less than 50% ownership. This opens doors for entrepreneurs with diverse ventures.
Additionally, for manufacturing projects, the size standard is based on employee count, sometimes up to 1,500 employees. Manufacturers can also access higher loan amounts, with a maximum of $5.5 million per project compared to $5 million for other industries.
MYTH: The loan is limited to a few industries.
FACT: The SBA 504 loan program is open to businesses across federally lawful industries. Manufacturing, health care, professional services, agriculture, restaurants, hospitality and special events, retail, child care and education, fitness, franchises – all these industries and more can utilize the 504 program.
To be eligible for the SBA 504 loan, applicants must:
- For-profit business, located in the United States
- Have a tangible net worth less than $20 million
- Average net income, after federal income taxes, of less than $6.5 million for the preceding two years
Download the program flyer and connect with a member of SomerCor’s loan origination team today to learn more!
