What are the Pros and Cons of the SBA 504 Loan Program?

Benefits and Drawbacks of the 504 Loan Program

SBA loans come with very low interest rates, and beneficial terms that make them particularly attractive to small business owners who cannot find reasonable terms elsewhere. However, there are both pros and cons to these loans. In this article, we’ll review both the benefits and drawbacks of these loans to help you determine if an SBA 504 loan could be a good choice for your business.

What are the Benefits of SBA 504 Loans for Small Businesses?

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Given that there are several different types of Small Business Administration loans available, not to mention conventional financing options out there, it makes sense to wonder exactly what benefits a small business could see from a 504 loan. Actually, there are quite a few that make this a very good option for almost any business.

  • Almost all small businesses in the U.S. will qualify: While the 504 loan program does have a wide range of requirements, almost all small businesses in the US will qualify for the program. However, realize that in order to qualify, your business must be beyond the beginning planning stages. That is, you must be ready to purchase property, invest in a building, or start construction of a new building, for example.

  • 90% financing: The 504 loan program offers small business owners access to up to 90% financing for their project. This is more than most other options on the market. Even 7(a) loans from the SBA are only able to fund 85 – 90% of the project. Conventional loans fall below that mark (60 – 75% funding).

  • Longer amortization periods: SBA 504 loans offer longer amortization periods (10, 20, or 25-year terms depending on what is being financed), allowing you to spread your payments over a longer amount of time to reduce the amount paid per payment.

  • No balloon payments: 504 loans are not balloon loans. That is, you will pay on your loan without having to worry about making a very large payment at the end of the term. In this way, it more closely resembles a fixed-rate home mortgage.

  • Fixed-rate interest rates: While the interest rate on the loan will vary depending on the market at the time the loan is made, it will be made at a fixed-rate interest rate, below the current market, and will be fixed for the duration of the loan’s term (10, 20, or 25 years).

  • Cash savings: Conventional loans require that you pay around 1% of the loan’s value out of your own pocket in fees. Even 7(a) loans require that you pay between 2% and 3.75% of the loan amount out of pocket. The 504 loan requires that you pay a maximum of 2.65% of the loan’s value in fees, but those costs are included in the loan amount, meaning that you have only the down payment when it comes to out of pocket costs.

  • Low down payment: Speaking of down payments, the SBA 504 loan usually only requires 10% of the loan value down. A 7(a) loan will require between 10 and 15% down, and a conventional loan will require between 25 and 40% down. This makes the 504 loan the most affordable option available to most business owners. However, note that your down payment requirements will vary depending on your situation. We’ll discuss that in another section.

What are the Drawbacks of the SBA 504 Loan Program?

While there are plenty of benefits that make a 504 loan appealing, there are a few drawbacks that you should know about prior to deciding on a funding solution. Note that these drawbacks apply to all SBA real estate loans, not just the 504 program.

  • Application Process: The 504 program is not the most streamlined in the world, largely due to the need to have three parties involved. It’s not just you working with a lender, as it would be with a conventional loan. Both the CDC and the lender must agree on terms, and ensure that they are in compliance with SBA requirements.

  • Underwriting: All SBA 504 loan underwriting goes through a single office. As you can imagine, that sometimes leads to bottlenecks. However, the underwriters are also exceptionally thorough and will question anything that seems out of the norm, or that needs further clarification. The more questions or concerns the underwriter has, the more involved the lender, CDC, and you must be in the process.

  • Time: It should be noted from the outset that SBA real estate loans are not fast. In contrast to a home mortgage loan, which might close in just 30 days, it often takes around 60 to 75 days to close on an SBA real estate loan and receive your funding.


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