As you’ve probably heard, interest rates are rising…in fact, many global investment banks are predicting a strong run of interest hikes in 2022. The Fed is preparing to exit from a couple of years of massive quantitative easing and near-zero policy rates, at a time of the highest inflation rates since the beginning of the ‘80s. And rising interest rates can have a serious effect on small businesses…impacting everything from growth plans to cash flow. Therefore, if you’re a small business owner with either a variable rate loan or plans for expansion, now is the time to prepare while rates are still low. Here are four reasons why, as interest rates are rising, small business owners are choosing the 504 Loan Program at an unprecedented pace.

SBA 504 loans, guaranteed by the U.S. Small Business Administration, provide long-term financing for the purchase of real estate, equipment, and other fixed assets. There are three parties to an SBA 504 loan—the borrower, the bank, and the SBA-approved certified development company (CDC) (Growth Corp). SBA 504 loans feature 10- to 25-year terms, low interest rates, and down payments as low as 10%.

1. Interest Rates and Loan Terms

Conventional loan rates are typically only fixed for a certain period of time, usually 3-10 years. After that, the rate is reset and could become variable. In a rising rate environment, that means you could find yourself with a much higher rate in the future. Conversely, one of the biggest benefits of an SBA 504 loan are the low, fixed interest rates and long loan terms. Since the loan is government-backed, the rates and fees on an SBA 504 loan are a lot lower than what you’re likely to find with a conventional loan. In a nutshell, SBA 504 rates are tied to the bonds that are sold to institutional investors, and the interest rates are typically reflective of 10-year U.S. Treasury bond rates, which are long-term, fixed-rate assets.

What this really means for you as the borrower is that through the SBA 504 program, you secure long-term, fixed-interest rates that are extremely competitive (often at or below prime). When you factor in the longer repayment terms (up to 25 years) and the reduced owner-equity requirement (usually 10% for SBA 504), it’s hard to find a better option anywhere.

Check out the current and historical interest rates for 504 loans

It’s no secret that when interest rates rise, banks charge more for business loans. Therefore, small businesses will likely flood to the SBA 504 loan program to either refinance their variable rate loans or to lock in today’s low, long-term fixed rate as a smart way to finance their expansion plans. The 504 offers a great opportunity for fixing occupancy costs well into the future.

2. Down Payment Requirements

For businesses looking to protect their cash flow, or facing tighter cash flow because of higher interest rates, the SBA 504 offers another advantage. Down payments as low as ten percent. This amounts to huge cash savings as most conventional loans require 20%, or even up to 35%, down.

3. Balloon Payments and Call Provisions

A balloon loan mortgage, common in commercial real estate, is usually a short mortgage that requires a large one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due, but you will either owe a lump sum at the end or be required to refinance the balance. This can lead to another round of building appraisals and credit approvals to endure. However, unlike conventional commercial real estate loans, a 504 Loan has no balloon payments.

Call provisions are similar to balloon payments in that, with a conventional loan, you may be required to maintain a specific debt-service coverage ratio as a way for lenders to lower their risk. If you fail to meet that provision, the bank can “call in” your loan. This means you would either have to pay off the balance, or refinance it. The SBA 504 Loan Program has no covenants or call provisions either. What you get is a long-term, fixed rate loan offering secure, predictable monthly payments for the life of the loan.

4. Closing Costs, Soft Costs and Other Fees

All loans come with closing costs, which include appraisals, loan origination fees, etc. These expenses can add up quickly. Conventional financing typically requires all closing costs to be paid upfront, but SBA 504 loans allow you to roll them into the loan, thus preserving your cash. Not to mention, if you are expanding your business, the cost of equipment, furniture and fixtures, parking lots, architectural fees, etc. can also be rolled into the loan, saving you even more.

Most Businesses Qualify

Most for-profit businesses are eligible to receive SBA 504 financing, so long as they average less than $5 million in annual after-tax profits and $15 million in net worth. Additionally, most national, regional, and community banks participate in the program…

Typical 504 borrowers:

Medical/Professional	Retail/Service	Industrial	Special-Use
Doctor’s Office	Restaurants	Recycling Facilities	Bowling Alleys
Veterinarian Offices	Retail Stores	Food Manufacturing	Funeral Homes
Dentists	Health Clubs	Steel Production	Car Washes
Attorneys	Day Care Providers	Packaging Companies	Assisted Living
Accountants	Pet Care Services	Commercial Printers	Grain Elevators
Chiropractors	Farmers Markets	Machine Shops	Livestock Feedlots
Architects	Boutiques	Freight & Transport	Mini-Storage
Graphic Designers	Auto Repair Shops	Wholesalers	Sports Arenas
Physical Therapists	Convenience Stores	Mass Production	Tennis Clubs

Funds from a 504 loan can be used for:

Acquisition of real estate (land and buildings)
Acquisition of equipment
Construction and renovation costs
Soft costs – the ability to include furniture, fixtures, and fees
Refinancing conventional loans

There is no limit to the total project cost with a 504 Loan. The SBA portion (40 percent of the total project cost) is capped at $5,000,000 or $5,500,000 for manufacturing projects or projects that implement green efficiencies.

Sometimes it takes a big investment of resources to jump start growth for a small business. Maybe there’s special equipment that could increase productivity. Or, a building next door that would make a perfect addition to an existing shop. Or, maybe an existing facility needs a serious face-lift. In each of these cases, an SBA 504 loan could be the perfect business financing solution. These loans are available to for-profit businesses to purchase real estate, equipment, and machinery. They can also be used to refinance existing commercial mortgage debt or to remodel existing facilities. SBA 504 loans are very business-friendly, requiring a down payment of typically just 10% and offering 10- to 25-year terms with low, fixed interest rates.

Want to Learn More?

Keep in mind, we work in conjunction with local banks…not in competition with them.

Why Growth Corp? We know small business. It’s our passion. We are proud to have helped thousands of businesses facilitate expansion. As the largest 504 Lender in Illinois, we have dedicated ourselves to making the 504 Loan Program as efficient and seamless as possible. In addition, we are an authorized Continuing Professional Education sponsor and can provide you with C.P.E. credits for our SBA 504 Loan Program update course.

Let’s join forces! Make Growth Corp your partner in helping businesses discover the very best solution to their expansion or refinancing concerns…the 504 Loan Program. If you want to learn more, we would be happy to meet with you. Just give us a call at (217) 787-7557 or contact any member of our Lending Team.

Interest Rates are Rising – Why SBA 504 Loans Are Crucial