How? Owners of small and mid-sized businesses can preserve capital and maximize cash flow to better afford the purchase of commercial real estate with the SBA 504 Loan Program. You receive all the benefits of ordinary bank financing but with less money down, longer fixed rate terms and below market interest rates.
The SBA 504 Loan Program enables 90% financing of the total project costs to preserve more capital for an appreciable asset while lowering current real estate expenses up to 40% instead of leasing, and up to 25-year fully amortizing terms to lessen the impact on cash flow while obtaining below-market, long-term fixed interest rates. Maturities of 10 and 20 years are also available.
There’s a great bonus: it allows the financing of closing costs and other normally out-of-pocket fees to be financed as part of the loan amount. Better yet, on top of all of this is a fantastic boon: the loan is assumable!
There’s long-term, fixed-rate financing for real estate and/or equipment purchases through SBA-licensed certified development companies (CDCs). Proceeds from 504 loans must be used for purchasing fixed assets such as: land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment with a useful life of at least 10 years.
The loan is secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a fixed rate loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and at least 10 percent equity from the small business.
Soft costs like architectural and legal fees, environmental studies, appraisals, and interest and fees on the construction and/or interim bank loan can also be rolled into the note. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing existing debt. The small business will realize upfront cash savings of approximately $100,000 on a $1 million project.
Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. The rate on the 504 loan is fixed for the of the loan and is set when the CDC sells the bond to fund the loan. 504 bonds are amortized securities. Fees total approximately three (3) percent of the debenture and may be financed with the loan. Currently, these fees are waived, although it may only be until the end of December or whenever the Stimulus funds runs out. Whichever comes first.
So, a low down payment of just 10 percent, which allows the business to preserve cash for working capital; fixed rate on the SBA 504 portion, whereupon small businesses don’t have to worry about the prime lending rate rising; long term, therefore reduction in monthly payments; and low blended interest rate, the rate between the bank portion and the SBA’s 504 portion, answers the question how to purchase commercial real estate if you are a small business. And remember: SBA 504 financing is available to purchase commercial real estate andcapital equipment.
As a footnote, all SBA loan programs are reserved for small businesses. SBA defines a small business as net worth under $7 million and net profits after taxes under $2.5 million. Click here for further details to find out how to qualify and what type of business may apply for the SBA 504 Loan Program. And as another footnote, this post also appeared slightly different in ezinearticles.com
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