Can I Use an SBA 504 Loan for an Online Business?
The Internet has revolutionized almost every industry. There are very few segments of the economy that have not been affected at least somewhat by the advent of the Internet, and many segments have seen the rise of “online only” businesses. Of course, this is something of a misnomer. The businessesBetter Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
SBA 504 Loans for Online Businesses: What You Need to Know
The Internet has revolutionized almost every industry. There are very few segments of the economy that have not been affected at least somewhat by the advent of the Internet, and many segments have seen the rise of “online only” businesses.
Of course, this is something of a misnomer. The businesses not truly online only. All businesses have a physical presence somewhere, even if there is no way for customers to walk into a brick and mortar storefront. How do online businesses obtain the funding they need to grow?
Actually, an SBA 504 loan might be an ideal option here. What advantages do online business owners find with a 504 loan over something like a 7(a) loan?
When it comes to online companies, one of the perks of setting up such an entity is the lack of a physical store. That allows companies to keep their costs down and be more competitive. However, this will only work for so long. Eventually, even a company that does almost all of its business will eventually need to expand and handle some things on their own premises.
For instance, suppose someone started a drop shipping business in 2010 that focused on organic gardening supplies and products. With the massive surge in demand for organic produce and the growing number of consumers interested in taking an active hand in growing their own food today, it is very likely that the company would have experienced significant growth. In fact, it is possible that they will have outgrown the drop shipping niche. What does that mean? Simply put, it means they will most likely need to expand by way of building a warehouse so they can handle their own shipping and receiving, order fulfillment, and the like.
This is a perfect fit for the 504 loan because it is tailored to the purchase of real estate (land and/or an existing warehouse), as well as heavy equipment (forklifts, pallet jacks, inventory management systems, and the like).
Of course, things are not quite the same for an online business as they are for a conventional brick and mortar store when applying for an SBA loan. The lack of a physical storefront can be a bit problematic, particularly for conventional lenders who will want to see very strong credentials and a solid credit score. Balance sheets, cash flow statements, P&L statements and other documents will also play a larger role in this situation.
With that being said, online businesses can and should take advantage of the growth offered by 504 loans.
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What are the eligibility requirements for an SBA 504 loan?
In order to take out an SBA 504 loan, your business must meet the following eligibility requirements:
- Your business must be a for-profit organization.
- Your business must meet current SBA size standards.
- Your business’ net worth cannot exceed $15 million.
- Your business cannot earn 1/3 or more of its income from packaging SBA loans.
- Your business must earn an average of $5 million or less per year (after taxes, and only for the preceding two years).
- Your business cannot be engaged in any sort of passive or speculative activities.
Note that additional requirements may be placed by CDCs or conventional lenders. You can find a full list of eligibility requirements and other important information with the SBA here.
What types of businesses are eligible for an SBA 504 loan?
How much money can I borrow with an SBA 504 loan?
The SBA 504 maximum loan amount is currently set at $5 million in lifetime dollars. However, if your business is a small manufacturer, you can borrow up to $5.5 million in lifetime dollars. It should also be noted that if you decide to embark on energy-related projects that fall under the “go green” heading, you can borrow substantially more. While all projects are capped at $5 million, you can ultimately borrow up to $16.5 million in lifetime dollars.
According to the SBA regulations, Investors are allowed to borrow anywhere between the minimum of $500,000 all the way up to $14 million — though investors would have to meet incredibly strict qualifications in order to be approved for this amount.
What are the terms and conditions of an SBA 504 loan?
The SBA 504 Loan Program offers long-term, fixed-rate financing for up to 20 years. The loan is fully amortized without a balloon payment. The terms of the loan depend on the amount of the loan and the type of project. Generally, the terms are as follows:
- For loans up to $5 million, the interest rate is fixed for the life of the loan.
- For loans over $5 million, the interest rate is fixed for the first 10 years, and then can be adjusted every 5 years.
- The down payment is typically 10% of the total project cost.
- The private lender puts in 50% of the project cost, while the CDC puts in 40% and the business 10%.
- The SBA backs the CDC portion of the loan, reducing risk for lenders.
- In the case of default, the private lender has first lien on project assets.
For more information, please visit https://www.sba.gov/offices/headquarters/ofa/resources/4049.
What are the advantages of an SBA 504 loan for an online business?
The advantages of an SBA 504 loan for an online business include the ability to purchase real estate (land and/or an existing warehouse) and heavy equipment (forklifts, pallet jacks, inventory management systems, etc.), as well as the potential for lower costs due to the lack of a physical store. Additionally, the 504 loan is tailored to the purchase of real estate and equipment, which is ideal for businesses that need to expand and handle some things on their own premises. Source