Inflation should not stop small businesses from applying for an SBA 504 Loan

With interest rates going up, many small businesses are reevaluating their expansion and investment plans.

Inflation is new for a majority of small business owners as the last period of significant inflation was more than 40 years ago, in the late 1970s and early 1980s.

While inflation adds a significant degree of uncertainty for small business owners, not to mention taking a chunk out of their bottom lines due to increasing operating and inventory costs, the SBA 504 Loan program provides certainty for small business owners looking to grow their business.

“There’s no reason why a small business owner should put their expansion plans on hold at this time. The SBA 504 Loan program is structured to the benefit of small business owners, regardless of the economic environment,” says Ashley Hruby, LCD Group senior lending director.

One of the key advantages of the SBA 504 Loan program is that the loan is tailor made to provide financing outside of a traditional bank, making it easier for small business loans to go to those small business owners who need them.

“Banks always take on risk when their loan to any commercial client and small business owners are often more of a riskier bet for businesses,” adds Derrick Becker, LCD Group loan officer. “But the SBA 504 Loan helps alleviate the risk to banks and meet the needs of business owners.”

Both Hruby and Becker acknowledge that interest rates are less than ideal. One year ago, in June 2021, SBA 504 Loan rates were 2.62 percent for 10 years, 2.77 percent for 20 years, and 2.89 percent for 25 years. Today, rates are 4.931 percent, 5.132 percent, and 5.191 percent.

Major Benefit: SBA 504 Loan Rates are Locked In

Additional increases are expected, which makes it imperative for small business owners to act now to lock in rates before they go any higher.

“By using the SBA 504 Loan program the rate is fixed for the life of the loan. With the rate fixed, the borrower does not need to worry about the rate of payment increasing during the repayment period,” says Becker. “This allows the borrower to have consistency with their cash flows and to plan for the time ahead.”

In a typical SBA 504 Loan situation, the lending institution provides 50 percent of the money, the SBA 504 Loan provides 40 percent, and the borrower contributes the remaining 10 percent. As an example, this means if a small business is seeking loans to cover $500,000 in capital expenses, the business will need to get a lender to loan $250,000. If a small business’ needs meet SBA 504 loan requirements, the business can receive up to $200,000, or 40% of the original $500,000, through the SBA. This leaves $50,000 for the small business to contribute from their own funds.

What Small Business Owners Need to Consider About the SBA 504 Loan

Even with this example, Hruby and Becker advise small business owners to know the following when considering whether to apply for an SBA 504 Loan.

Know what you want to use the loan for

SBA 504 Loan qualifications are specific. Loans must be for purchasing existing buildings, purchasing land, funding land improvement projects, building new facilities, updating outdated facilities, or investing in long-term machinery. If you want to use the loan for any other aspect of your business, an SBA 504 loan may not be for you.

Know your business’ net worth

In order to qualify for an SBA 504 loan, small businesses must have a net worth of less than $15 million, and annual earnings after taxes cannot exceed $55 million. Businesses that do not fall within this range, do not qualify for an SBA 504 loan.

Know how much you need to borrow

The most money one can borrow through an SBA loan is $5 million. If a project requires borrowing more than $5 million, then an SBA will not be able to fully cover the cost.

Do you have adequate collateral?

The collateral for an SBA 504 loan includes a personal guarantee of any owner of at least 20 percent. As a whole, though, the project itself is what is used as collateral for the loan.

If a small business matches these parameters, then the SBA 504 Loan is ideal and both Hruby and Becker encourage small business owners to contact them to start the application process.

Click here to learn more about the SBA 504 Loan and contact LCD Group’s SBA 504 Loan Team of Ashley Hruby and Derrick Becker. Ashley may be reached ashley@lcdgroup.org or at (701) 667-7607. Derrick may be reached at derrick@lcdgoup.org or at (701) 667-7622.