The SBA 504 Loan has rightfully been called “the loan that grows America.” Millions of small businesses across America, and hundreds throughout North Dakota have benefited from this program.
Without question, the SBA 504 Loan is one of the – if not the – very best loans for small businesses. With terms for 10 years, 20 years, or 25 years, borrowers are provided with fixed rate financing for the purchase of long-term assets such as:
- Acquisition of buildings or land,
- Purchases of machinery and other equipment,
- Costs of new construction or renovation,
- Professional fees (such as engineering and architectural fees),
- Leasehold improvements, and more.
These criteria, coupled with how straight-forward the program is, makes the loan attractive for borrowers and ideal for lenders.
Mitigating risk for lenders: For lenders, the chief benefit of the SBA 504 Loan is the that it mitigates the lender’s risk.
- SBA 504 Loans are only provided through Certified Development Companies (CDCs), such as Lewis & Clark CDC, which is part of Lewis & Clark Development Group.
- SBA 504 loans come with a partial government guarantee, which mitigates a significant degree of risk for lenders. In fact, SBA 504 rates are the lowest of any government guaranteed business loan.
- This mitigated risk allows lenders to provide an overall more attractive financial package to its borrower.
The SBA 504 Loan’s winning 50-40-10 formula: Lenders and borrowers alike should see the SBA 504 Loan as two loans in one.
- The first loan comes from an applicant’s bank, which is responsible for approximately 50 percent of the financing.
- The second loan comes from the CDC, which funds around 40 percent of the loan.
- The applicant is responsible for the remaining ten percent in the form of a down payment on the loan. The down payment can range from 10 to 20 percent dependent on years in business and any special purpose properties. In these instances, the second loan percentage decreases.
Every month, CDCs submit closed loans to the SBA, which then pools the loans together and sells them to investors. The investors provide the capital that actually funds the loans. During this process, the SBA 504 interest rate is determined for the next funding of SBA 504 loans.
The big picture for lenders: Ashley Hruby, LCD Group senior lending director, says the SBA 504 Loan checks all the boxes for lenders.
- “The benefits for lenders is as attractive as you will find on the market,” Hruby observes. “This tool allows for the ability to offer up to 90 percent long-term financing for purchasing long-term commercial assets”
Hruby specifically cites four key SBA 504 benefits to lenders:
- Minimizes collateral risk
- Helps manage lending limits and industry exposure
- Allows lenders to earn fees and interest income on interim loans related to a project (Lewis & Clark CDC may also be able to assist with interim loan if the lender prefers less exposure)
- Expands a lender’s business loan portfolio
Additionally, CDC staff are flexible with the lender-borrower relationship. Lewis & Clark CDC can work directly with SBA 504 applicants, which saves lenders staff time, or CDC staff can stay behind the scenes allowing the lender to work closely with the borrower.
“Something else that lenders need to remember is they can fund as little as fifty percent of the project and be in first-lien position,” notes Hruby. “The very structure of the program is to be a win-win-win for the borrower, the lender, and, ultimately, for the local economy.”
Dig deeper: Hruby encourages all lenders to dig deeper into the SBA 504 Loan program and to contact LCD Group for more information about how the program can help lenders assist their commercial clients.
More Context: LCD Group’s recent SBA 504 Loan client successes: