The true bottom line of an expansion project, no matter the size, is far more than just the cost for foundation and bricks. Let’s face it, soft costs can constitute a big portion of expansion costs. And most conventional bank loans only finance a percentage of the purchase price/appraised value, leaving borrowers to pay for soft costs and closing costs out of their own pocket.
There is another way.
SBA 504 Loan Program
The SBA 504 Loan Program finances total project costs. Total project costs includes not just the costs for land and existing building, hard construction and equipment, but also soft costs such as:
Furniture and Fixtures
- Lighting
- Office furniture
- Partitions
- Shelving units
- Menu boards
Leasehold Improvements
- HVAC, Flooring, Electrical, Plumbing
- Landscaping
- Parking Lots
Other Costs
- Appraisals
- Attorney fees
- Building permits
- Environmental reviews
- Design/Architectural fees
- Inspections
- Interim interest
Equipment
- X-Ray/Digital imaging machines
- Telephone and computer systems
- Fitness equipment
- Forklifts
- Alarm systems
Project Scenario
A fast-food retail business sought financing to purchase and renovate an existing building in order to open a new fast food chain restaurant. This project involved a lot of soft costs in order to build-out the restaurant according to franchise standards, but the borrower needed to maintain as much working capital as possible to keep operations running smoothly at all the other restaurants.
The bank recommended the 504 Loan Program because it finances total project costs and has low down payment requirements. Plus, any money the borrower had already invested in the new restaurant could be counted as equity in the property, thereby preserving working capital even more. Soft costs financed into this project included: walk-in coolers, shelving, lockers, commercial grade appliances, menu boards, point of sale systems, signage, dispensers, booths, alarm systems, awnings, building permits, engineering fees, etc.
[su_table]
| Land & Building | $500,000 |
| Improvements | $325,000 |
| Equipment | $475,000 |
| Other Costs | $25,000 |
| Total | $1,325,000 |
[/su_table]
If a bank was willing to finance the project conventionally, it would typically lend up to 80% of the project costs at a floating interest rate with a 15 year amortization and a balloon after three to five years. However, utilizing the 504 Loan Program, up to 90% of the project costs can be financed. The bank lends up to 50%, thereby reducing its risk and corresponding interest rate. Growth Corp lends up to 40% at a fixed rate for 20 years, with a down payment of only 10% from the borrower.
[su_table]
| Conventional | With 504 | |
| Bank | $1,060,000 | $662,500 |
| Growth Corp | $0 | $530,000 |
| Borrower | $265,000 | $132,500 |
| Total | $1,325,000 | $1,325,000 |
[/su_table]
As shown, the borrower’s equity injection can be cut in half, thereby conserving cash and providing the necessary working capital to support continued growth. Additionally, cash flow is improved as a result of the longer maturity and potentially lower interest rates.
Typical 504 Financing Structure
[su_table]
| Project Costs | Source | Lien | Funding Limits | Rate | Term Real Estate | Term Equipment |
| 50% | Financial Institution | 1st | No limit | Market | 10 years or longer | 7 years or longer |
| 40% | Growth Corp 504 | 2nd | $5 to $5.5 million | Fixed | 20 years | 10 years |
| 10% | Applicant/Borrower |
[/su_table]