The Purpose of 504 SBA Loans

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The 504 Loan is an attractive financing option designed by the U.S. Small Business Administration (SBA) to support and promote small business growth. With a minimal deposit and a fixed interest rate below the market, the program is more detailed about what you can do with the funds. The funds must be used to for fixed assets to either purchase, expand, renovate, or refinance your real estate and/or equipment.

Fixed assets like commercial property, land, some furniture for the business, and the required remodeling and modifications that will help your firm grow, are qualified uses. Below are the 3 main objectives of 504 SBA loans.

Access to Small Businesses Entrepreneurs

The SBA’s ‘small’ description is broader since most (>90%) for-profit enterprises qualify for 504 SBA loans. In the case of real estate purchases, the business must occupy at least 51% of the space. For construction loans, the occupancy requirement is increased to 60% day one going to 80% in a reasonable time after closing. This provision maintains the Program’s integrity, as it is designed to assist small businesses rather than real estate investors.

Long Term and Fixed Interest Rate

The SBA second mortgage has a fixed rate unaffected by market volatility or inflation projections after it funds. The interest rate is set monthly prior to funding and is loosely indexed to the 10-year Treasury yield. The rate has been continuously low and constant for the previous ten years, averaging under 6% and going as low as 3% during the pandemic. The current rate is right around 5% for the 25- and 20-year loans and just under 5% for the 10-year loan.

Low Down Payment

One of the most appealing aspects of the program is the low-down payment of only 10% (15% for start-up businesses or special purpose properties; 20% if both start-up and special purpose). Many conventional loans need a 20% or greater down payment, which is out of reach for many small business owners. The low deposit allows many entrepreneurs to purchase their facility who would otherwise be unable to acquire a building. Small businesses are able to keep valuable working capital thanks to the modest injection of the 504 SBA loans. Renovations and closing costs (appraisal, environmental reports, interim loan fee, etc.) can also be included in the project, allowing for even more financial savings.

The 504 SBA loans are designed to make it easier for more businesses to access capital, strengthening the economy and stimulating more entrepreneurial growth prospects through new channels of trade and employment. For more information, give Michigan Certified Development Corporation a call today.