Given the challenges lenders are facing, more banks are increasingly choosing to offer the 504 Loan Program. Here’s why:

• Reduced exposure on commercial real estate
• Ability to offer borrowers a long-term, fixed-rate product as part of their financing package
• Lower advance rates to ease liquidity issues
• Higher bank capital requirements
• Increased ability to get deals done in a tight credit market
• Lower customer down payment translates to higher customer deposits at the bank

And, it’s not too late to use the 504 with a project that is currently in interim financing. Consider this:

• Do you have a construction project that has a cost overrun?
• Want to improve your collateral position?
• Looking to manage liquidity or the bank’s total lending to one borrower?
• Feel your borrower could benefit from the certainty and stability a 20-year fixed rate provides?
• Does your borrower need to finance some expenses related to furniture/fixtures?
• Have a borrower that could have easily come up with 20-25% down in the past, but now might need that extra capital?

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Did you know…

• The 504 Loan Program was designed by the SBA to promote economic development and is structured to be a win-win situation for both banks and small business owners.
• Small business owners are able to utilize up to 90% financing to invest in commercial property.
• The 504 allows smaller banks to entertain larger projects because it manages liquidity by requiring the bank to advance only 50% of the project.  In addition, the bank gets first lien position on the loan.
• The lender sets the interest rate for their portion of the loan, and by participating with the SBA, the bank also meets economic development and community reinvestment goals.
• The borrower’s down payment for a 504 loan can be cash or land value, which can include building, structure, and other site improvements that will be part of the project property previously acquired.
• If the borrower owns equipment that is heavy or highly calibrated (such as a large printing press) that must be moved as an essential part of the project, then any special moving costs (including dismantling and installation) may be included in the project costs.
• Expenditures within 9 months of the date of the application, including land and buildings, and/or equipment, can be included in the project costs and be reimbursed by the interim lender net of the borrower's equity injection.
• The 504 Loan Program can still be used as a source of financing after a construction project has already started…and possibly even after completion…as long as it is still being financed with a construction/interest only loan.
• The 504 enables borrowers to include renovations, closing costs, and other soft costs along with furniture, fixtures, and equipment into the financing package.
• Small businesses looking to go “green” may qualify for larger 504 loans…up to $5.5 million dollars per project…under the SBA’s new energy goals.
• Small businesses that are looking to expand can also use the 504 to refinance existing debt that was used to purchase real estate or other fixed assets.

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With lease expenses expected to rise dramatically in the coming years, small business owners should consider purchasing rather than leasing – with the 504 their mortgage payment may be less than their current lease payment.

Many small business owners rent their business property because they fear that purchasing real estate will require a large down payment.  The 20-25% down payment required with conventional financing dips too far into their working capital and may leave them short on cash for their everyday business expenses.  However, with the 504 Loan Program’s low equity requirements, small business owners can realize the benefits of property ownership while still preserving their working capital.  Check out some of the advantages of owning versus leasing:

• Stabilize, or even reduce, the business owner’s monthly real estate expense
• Build equity – increases net worth with every monthly payment
• Additional tax savings
• Long-term appreciation
• Business can continue to generate income even after owner retires
• No monthly lease expense in the future

Let’s look at an example… a restaurant has been leasing space on North Main Street since incorporating in 2007.  The company currently pays monthly rents of $5,000 plus real estate taxes.  An opportunity to purchase the property for $505,000 came about, and was financed 50% by the first mortgage lender and 40% by Growth Corp – with the borrower only putting down 10%.  The combined monthly payment on the acquisition of this property is under $3,500/month – a savings of over $1,500.

So, if you have a commercial banking client who is leasing their building, mention the 504 Loan Program.  Consider what it would mean for their business and financial net worth in the long run if they purchase rather than lease.

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