Lots of small businesses and their advisors steer clear of the SBA 504 loan because of commonly-held misconceptions about the SBA itself. Since this type of financing is our specialty, we work closely with the SBA on behalf of our small business Clients, and we can dispel these myths about the U.S. Small Business Administration.
The U.S. Small Business Administration's (SBA) loan programs have garnered much criticism over the years. Some complaints may have been warranted in the past, but these days, the SBA is different.
Below are some of the most common myths and misconceptions regarding SBA loans, along with our explanation of the truth. If, after reading this list, you still have some questions about the SBA 504 loan or SBA loans in general, don't hesitate to contact us.
Myth: SBA loans take too long.
The SBA is aware of small business owners' time and of how busy they are. Certified Development Companies (CDC's), which are the SBA's representatives on these loans, now work quickly and efficiently. They often can examine borrowers' underwriting documents in only 48 hours. If an SBA loan's approval process takes more time than this, it may be that a particular lender is holding it up.
Myth: SBA loans have too much paperwork.
There have been great efforts to streamline the overall application process. In most cases, the required documentation for SBA loan approval nearly matches that of an 80 percent loan-to-value conventional commercial loan. Some borrowers have even found this to be less paperwork than what they faced when they refinanced their home loan. Specialized commercial lenders (like yours truly) have helped this along, too.
Myth: SBA loans are only for the worst borrowers or for startups.
Some SBA programs are designed for startups or for businesses still in their infancy. Overwhelmingly, however, 504 loans are not meant for new businesses that should be more concerned with using their capital to establish their place in the competitive landscape. Many 504 loan borrowers are companies that have tens of millions of dollars in sales.The equity savings gained from SBA 504 loans are meant to provide economic development. Unhealthy companies simply cannot do this. Plain and simple, this loan program is a means of leveling the playing field for healthy small businesses contemplating commercial property ownership.
Myth: SBA loans have too many fees.
This myth has been unjustly applied to all programs under the agency's umbrella. In truth, origination fees for SBA 504 loans average about 25 to 50 basis points higher than ordinary commercial bank loans. However, even these fees can usually be negotiated for borrowers with better debt-service-coverage ratios and personal credit. Even so, these slightly higher fees seem reasonable and negligible to most business owners who understand that getting the highest cash-on-cash return available to them is paramount. This type of financing is tailor-made for small business owners who want to decide where and when to best use their hard-earned capital yet still enjoy the advantages of commercial property ownership.
Myth: SBA loan rates are higher than conventional lending.
SBA 504 loans nearly always have fixed rates. The effective, blended interest rates are competitive with conventional bank financing. In addition, the government-guaranteed second mortgage on a 504 loan is the least-expensive money available for typical small business owners who want to own their commercial real estate.
Myth: All SBA lenders are the same.
Any lender can do a 504 loan, but it takes experience and expertise to do it right every time. Choose a lender that has the proven track record of successful 504 loan closings and happy customers.
- 1. Ninety-percent (90%) Loan-to-Cost Financing
We can provide up to ninety-percent (90%) financing of the total project cost, which includes the land, construction/renovations, soft costs and closing costs. Ordinary commercial loans require two to three times the equity (20-30% down), so it's easy to see how a small business owner can preserve more capital and use it to grow the business in other ways with the SBA 504 loan.
- 2. Long-Term, Below-Market, Fixed Interest Rates
There are very few cases where variable interest rates make sense when it comes to small business commercial property financing. The ability to get long-term (up to 25 years), below-market, fixed interest rates makes it possible for business owners tosave on interest expenses.
- 3. Longer Loan Amortizations
Longer loan amortizations allow for smaller monthly payments, which have less impact on business cash flow. Prepayments are allowed, if that's preferred, so our loans give flexibility. Remember, though, that it's not smart to sink too much capital into a non-income-producing asset like commercial property. There are better ways to use that money and grow the business.
- 4. No Balloon Payments, Calls or Covenants
These are often features of ordinary commercial loans that protect the lender, and they are definitely not in the best interests of small business owners. 504 loans give business owners more control, more peace-of-mind, and less lender micro-management (something nobody likes).
- 5. Close within 30 Days
Because we specialize in this type of financing, we're extremely efficient at it. And we flat-out hustle. We want to get each of our Clients to the closing table so they can start enjoying the benefits of commercial property ownership as soon as possible. We despise dilly-dallying and hope you do, too.
- 6. Specialists Make the Process Simple
To be completely honest, the type of financing we do is complicated, and that's why few lenders will recommend a 504 loan. But this is all we do, and we do it really well. Working with a specialist like us makes everything simpler for our small business Clients.
- 7. Assumable Loans
SBA 504 loans are always assumable. If another person or business were to purchase a property we've previously financed, they would get the benefit of the below-market, fixed interest rates that came with the original loan. If it becomes necessary to sell a property down the road, this is a great feature.
- 8. No Disruption of Existing Banking Relationships
Because of our specialization - again, we only finance commercial property for small business owners - there's no need to worry about changing any of your existing banking relationships. We keep it simple for the small business owners we work with.
- 9. It's the Overall Best Deal for You
As you can see, the SBA 504 loan offers many advantages that just aren't possible with ordinary commercial loans. Small business owners who are serious about owning commercial property to grow their businesses and plan for retirement should seriously consider this type of specialized financing. After all, it was designed specifically for this purpose!