As published in Scotsman Guide's Commercial Edition, August 2011.
In the past, many small-business owners wouldn’t look twice at U.S. Small Business Administration (SBA) 504 loans. These loans were known for hefty delays and a barrage of documentation requirements, as well as a scarcity of lending professionals capable of closing them successfully.
But things have changed. The SBA has revamped its systems, and more banks have preferred-lender status. This allows for approval at the bank level; the SBA simply confirms the bank’s decision.
Today, the problem is getting small-business owners into these loans. Many banks do not find the 504 loan attractive because of its low profitability potential. In addition, some banks that provide these loans often are not knowledgeable about the 504 program.
Many business owners shopping for a commercial loan may be presented with an SBA 7(a) loan first. This product isn’t ideal for commercial real estate because it’s short term, offers variable interest rates and requires more capital.
Here are 10 reasons why the SBA 504 loanmay be the best loan product for small- and midsize-business owners:
1. Capital preservation: The 504 loan offers as much as 90 percent financing of the total project costs for commercial real estate purchases. This allows business owners to preserve more capital for other uses.
2. Below-market interest rates: Businesses can save on interest expenses by not accepting market interest rates when below-market, fixed interest rates are available with the 504 loan.
3. Longer loan amortizations: Longer loan terms allow for smaller monthly payments, which helps a business’s cash flow. In addition, because prepayments are allowed (generally as much as 20 percent of the principal balance in the first 10 years), business owners can have the best of both worlds — smaller monthly payments when times are tight but the ability to prepay when excess cash is available.
4. Less impact on cash flow: Because borrowers only put in 10 percent equity, get below-market interest rates and enjoy longer loan amortizations, their cash flow is less affected, and they can still realize all the advantages of purchasing or constructing commercial real estate.
5. Reduction in real estate expenses: Owning commercial real estate instead of leasing typically means a significant reduction in real estate expenses — as much as 40 percent. Owning also has the added benefit of converting a large variable expense (rent) to a fixed cost (mortgage).
6. Financing available for closing and other soft costs: Financing closing and other soft costs with the 504 loan can help keep out-of-pocket expenses to a 10 percent minimum.
7. No balloon payments, calls or covenants: Without balloon payments, calls or negative loan covenants, borrowers have more control, more peace of mind and less lender micromanagement.
8. Thirty-day closing: Closing in as few as 30 days allows business owners to take possession of their new asset and start reaping the rewards quickly.
9. Assumable loans: Future sales of properties financed by 504 loans may benefit from having assumable mortgages at today’s low interest rates.
10. Best deal overall: This loan offers small and midsize businesses advantages previously only known to larger enterprises.
When you take a closer look at the SBA 504 loan, it is clear that it is the right choice for many small-business owners.
Marcus Mavakala is CEO of Los Angeles-based Greenhill Commercial Capital Group Inc. Greenhill Commercial focuses primarily on the U.S. Small Business Administration’s 504 loan, but the company also offers all other commercial loan products.
Reach Mavakala at (877) 679-4455 or firstname.lastname@example.org.