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SBA 504 Loans vs. Traditional Commercial Loans: Key Differences for Brokers!

When comparing SBA 504 loans to traditional commercial loans, there are several key differences that brokers and lending professionals should be aware of. These differences can significantly impact your clients' financing options and help you determine which loan is the best fit for their needs.

1. Loan Structure

The SBA 504 loan is structured differently from traditional commercial loans. It involves three parties:

The borrower contributes at least 10% of the project cost.

The senior (1st mortgage) lender (bank or finance company) provides 50% of the financing.

A Certified Development Company (CDC), backed by the SBA, finances the remaining 40%.

Traditional commercial loans, on the other hand, are usually handled entirely by a single private lender and often require a 20-30% down payment from the borrower.

2. Down Payment Requirements

One of the most attractive features of SBA 504 loans is the low down payment. Business owners only need to provide 10% of the project cost, whereas traditional commercial loans typically require 20-30%. This lower down payment allows businesses to preserve more of their cash for other needs.

3. Interest Rates and Terms

SBA 504 loans offer fixed interest rates over the life of the loan, providing long-term stability. Traditional commercial loans often have variable interest rates, which can increase over time. Additionally, SBA 504 loans have repayment terms of 10, 20, or even 25 years, whereas traditional loans may have shorter terms, leading to higher monthly payments.

4. Use of Funds

SBA 504 loans are restricted to certain types of fixed asset purchase and refinance, such as real estate, debt refinancing of eligible debt, or building improvements. Traditional commercial loans generally have more flexibility in terms of how the funds can be used.

5. Risk for Lenders

SBA 504 loans reduce the risk for private lenders because the SBA guarantees a portion of the loan. This makes lenders more willing to finance large projects for small businesses. In contrast, traditional loans carry more risk for lenders, which can lead to stricter requirements and higher interest rates for borrowers.

Conclusion For brokers, understanding the differences between SBA 504 loans and traditional commercial loans is key to helping clients make informed decisions. While SBA 504 loans offer lower down payments, fixed rates, and longer terms, traditional loans offer more flexibility in how the funds are used. Knowing your client’s specific needs will help you recommend the best financing solution.

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The episode is live! The funds are out there...... #fundingyourbusiness #podcast

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Understanding SBA 504 Loans: The Basics

For brokers and lending professionals working with small business owners, understanding the full range of financing options is key to delivering the best possible service. One of the most valuable tools in your toolkit is the SBA 504 loan program. Often underutilized, SBA 504 loans offer substantial benefits for business owners looking to expand their operations or invest in commercial real estate and equipment. Here’s a breakdown of the basics of the SBA 504 loan, and why you should consider it as a top option for your clients. What is an SBA 504 Loan? The SBA 504 loan program, administered by the U.S. Small Business Administration (SBA), is specifically designed to help small businesses acquire fixed assets like real estate, machinery, and equipment. The primary goal of the program is to promote job creation and economic development through business expansion. Unlike other SBA programs, the SBA 504 loan is structured as a partnership between the SBA, a Certified Development Company (CDC), and a private lender, such as a bank, credit union, or finance company. It offers long-term, fixed-rate financing for major fixed assets, which is particularly attractive in today’s fluctuating interest rate environment. The Structure of an SBA 504 Loan SBA 504 loans have a unique structure, split between three components:

Private Lender Portion (50%) – The private lender provides 50% of the financing for the project. This can be a traditional lender such as a bank, credit union, or other approved lender.

CDC Portion (40%) – A Certified Development Company (CDC), a non-profit organization certified by the SBA, provides up to 40% of the financing through a loan backed by the SBA. There’s a 5% reduction in the LTV in the case of 1) special purpose properties, and 2) “Startup businesses” as defined by the SBA. With both on the same transaction, the SBA provides 30%, or a combined LTV of 80%.

Borrower Portion (10%) – The business owner is typically responsible for a down payment of just 10%, significantly lower than the 20-30% required for traditional commercial loans. The borrower portion is increased in the cases cited in the above paragraph on the CDC portion. This structure makes SBA 504 loans one of the most affordable financing options for small businesses, with minimal down payment requirements and long repayment terms. Key Benefits of SBA 504 Loans 1. Low Down Payments – One of the most attractive aspects of the SBA 504 loan is the low down payment, which allows businesses to preserve more of their cash flow. With just 10% down, business owners can conserve their working capital for other needs, such as inventory, payroll, or expansion. 2. Fixed Interest Rates – Unlike many traditional loans, SBA 504 loans offer fixed interest rates. This gives borrowers the certainty of knowing exactly what their payments will be for the life of the loan, typically 10, 20, or even 25 years. In a market with rising interest rates, this is a major advantage for long-term planning. 3. Long-Term Financing – SBA 504 loans offer long repayment terms of up to 25 years for real estate purchases, and up to 10 years for machinery and equipment. This extended repayment period makes monthly payments more manageable for small businesses. 4. No Balloon Payments – With the SBA 504 loan, businesses don’t need to worry about large, unexpected balloon payments that are common with traditional loans.