504 loan program winning proposition for borrowers and lenders

The U.S. Small Business Administration 504 loan program — one designed to finance the purchase, improvement or construction of a commercial building — has become somewhat of a bread and butter loan program for small business expansion as it’s considered a win-win-win for all three parties involved.

The loan structure for a 504 is commonly divvied in a 50/40/10 split in which the primary lender (bank) finances up to 50 percent of the borrower’s total project cost and takes a first lien position on the property. A certified development company, a lending entity certified by the SBA to implement the 504 loan program, provides up to 40 percent of the loan and takes a second lien position on the property behind the primary lender. This leaves the small business borrower responsible for a minimum 10 percent down, which is less of a strain on a cash flow position than many conventional financing options.

From an SBA perspective, the goal of the 504 program is to stimulate the local economy by enticing banks to lend money to small firms needing to buy land, buildings and equipment. The SBA commits to a maximum 40 percent stake in the loan project while sitting in a second lien position. The inclusion of a second party lender (CDC) to help pitch in on a borrower’s project cost can mitigate much of the loan risk on the bank’s 50 percent conventional portion.

In partnership with a bank, the long-term, low-rate 504 financing plan can provide a small business with up to 90 percent of a project’s total financing costs, so the borrower can approach the project with less money down.  This is a great way for small business owners to begin building wealth and equity in their businesses and stop paying rent to landlords.

With temporary 504 refinance provisions, borrowers that have been on the books for at least two years are able to refinance up to 90 percent of their current appraised property value or 100 percent of the outstanding mortgage, whichever is lower. Refinancing costs also can be wrapped into the loan.

Although existing 504 projects and government-guaranteed loans are not eligible to be refinanced, Congress has authorized the SBA to approve up to $15 billion in loans under this program, which could help as many as 20,000 businesses.

Each month, certified development companies — there are six CDCs in Colorado — identify projects in their communities that they wish to fund using the SBA 504 loan program after being approached by a local lender or a borrower directly. All these individual projects are then pooled into a single bond, which is then sold on the market in New York to large institutional investors. When the bond is sold, the SBA provides the backing of the federal government to the purchaser, which makes this bond an attractive investment and results in the small business borrower getting a competitive rate on the 504 portion of their project financing.

As an example, SBA 504 interest rates for February, March and April were 6.07 percent, 5.94 percent and 5.9 percent, respectively.

With forecasts of continued market growth and expansion in the near future, the 504 program can help new borrowers achieve similar growth in the equity of their business investments.

For more information on the SBA 504 loan programs as well as other programs and services, visit the Web site at  www.sba.gov or call the SBA Colorado District Office at (303) 844-2607.


Victoria Barbatelli is an assistant loan officer at Colorado Lending Source.  Reach her at Victoria@CLSLoans.org.