The Small Business Administration has been a part of the small business fabric in the US for many years. It offers loan programs to suit various small businesses at different stages of their development. It’s the ultimate financing alternative for small businesses that can’t find other business funding options.
The SBA has various loan programs that target diverse business needs ranging from building improvements, to acquiring utilities, facilities, buildings, land, machinery, and equipment, to street landscaping and more.
SBA loans are subdivided into three categories depending on small businesses’ needs:
7(a) Loans
7(a) loans have a broad application scope for small businesses. They can be used for many business purchases like working capital, equipment, inventory, real estate purchasing, and business expansion.
Under the 7(a) loans, a small business can procure nine different types of loans, each targeting a different business need. These include: Standard 7(a), 7(a) Small Loan, SBA Express loan, Export Express, Export Working Capital, International Trade, Preferred Lenders, Veterans Advantage, and CAPLines.
Microloans
Microloans are small loans of up to $50,000 maximum that can be used to purchase equipment and inventory as well as working capital and complete various business projects. Microloans are accessible to home-based businesses and self-employed individuals through the SBA lending program.
While 7(a) loans and microloans have their advantages, the SBA 504 loan is the ideal loan for both buyers and sellers of commercial real estate.
CDC/504 Loans
CDC/504 loans are large loans up to $5.5 million that the business can use to acquire fixed assets like real estate and equipment. The CDC/504 loans or SBA 504 loans are only available through Certified Development Companies (CDCs), like BFC, and are partially funded by banks.
For businesses looking to invest in commercial real estate and real estate developers looking to sell property, the SBA 504 loans are the best loan option because of the way that they are structured. The financing is broken down into 10-40-50 with the buyer, the CDC, and a bank all involved in funding:
- The loan borrower pays 10% of the costs.
- The CDC makes an SBA-guaranteed loan that is backed by the government for up to 40% of the cost.
- A lender, typically a bank, covers the remaining 50% of the cost.
How Can You Benefit from the SBA 504 Loan?
SBA 504 loans appeal to businesses looking to invest in commercial property as well as commercial property sellers and agents.
The SBA 504 loan is beneficial for both buyers and sellers of commercial real estate
The SBA gives the CDC a checklist of rules and regulations that the CDC has to abide by to qualify the client for the loan, this makes it easy for the client to qualify for the 504 loan. Banks have to follow the same SBA rules as well as their own rules which can make it harder for buyers to qualify for the loans compared to going through a CDC like BFC.
When a loan borrower works with BFC to qualify for the 504 loan, BFC provides a pre-qualification letter ensuring that the borrower’s financials have been properly reviewed and that the borrower should be able to qualify for the loan.
Other SBA 504 loan benefits include:
- Low-interest rates. The loans are safer for lenders because the government backs them in case the loan defaults.
- Borrowers have up to 25 years to pay the loan when purchasing real estate and 10 years when purchasing equipment.
- Borrowers can access up to $5.5 million from the CDC/504 program, which gives the buyer significant buying power.
Is Your Commercial Real Estate Project a Fit for SBA 504 Loan?
SBA 504 loans are highly regulated in terms of what it can and can’t use the loan for. To maximize the chances of getting approved, a borrower must ensure they apply for the loan for the right reasons. The first step is to determine whether the commercial real estate project the borrower has fits within the stipulated legal guidelines of an SBA 504 loan.
How Can the SBA 504 Loan Be Used When Purchasing Property?
The loans have strict usage policies directing that the loan only be used for fixed assets and a few soft costs such as appraisals, environmental and construction interests, and closing costs. Borrowers can use an SBA 504 loan proceeds for the following property needs:
- Purchasing an existing commercial building.
- Purchasing land and land improvements.
- Constructing new facilities.
- Renovating existing commercial facilities.
Money from SBA 504 loans cannot be used for working capital, inventory or for paying or consolidating debt.
What Types of Properties Can You Use an SBA 504 Loan For?
While the SBA loan is for real estate, there are properties borrowers can and cannot buy using this type of funding. Some of the ways borrowers can use an SBA 504 loan and the properties borrowers can purchase include:
- Hotels
- Office buildings
- Retail buildings
- Daycares
For a property to qualify for purchase through an SBA 504 loan, the property must meet the following requirements:
- The business must occupy at least 51% of the rentable property within one year of ownership for existing buildings.
- For new constructions, the business must occupy 60% of the rentable property and may permanently lease 20% and temporarily lease another 20%.
On the other hand, borrowers cannot use an SBA 504 loan for:
- Speculative real estate investments
- Rental properties
How Does the SBA 504 Loan Work for a Commercial Property That is Not Yet Built?
Borrowers can use an SBA 504 loan on a commercial property that is not yet developed and for the construction of the property. Expectedly, there are several requirements when borrowers want to use the loan for construction, among them are:
- Evidence of compliance with the “National Earthquake Hazards Reduction Program,” or a building with equivalent provisions.
- An appraisal that must estimate what the market value will be at completion of construction and statement from the appraiser.
- The general contractor and project management must ensure that the building was completed from the plans and specifications upon which the value was based.
The CDC has to obtain the statement to close the loan, otherwise the CDC would need prior written permission from the SBA.
What Can Business Finance Capital (BFC) Do For You?
Business Finance Capital (BFC) is a non-profit, Certified Development Company (CDC) with over 20 years of experience financing small businesses. We work with banks under the SBA 504 loan program to provide small business owners with loans to help them secure commercial properties and lands that can help their businesses grow.
We have loan experts ready to talk to you about your financing needs and walk you through applying for an SBA 504 loan, saving you time and effort and maximizing your chances of getting approved for the loan.
Our goal is to provide businesses with underwriting and loan services that meet their needs and help them achieve their goals. We have an expert team that takes the time to understand your needs and deliver solutions tailored to your current financial needs.
What is a Certified Development Company (CDC)?
A Certified Development Company is community-based and company approved (certified) by the SBA to promote economic growth within its area of operations. CDCs help build community wealth by anchoring capital in communities through the development of commercial and residential property and enhancing the community’s conditions by supporting the financing of local businesses.
What Does BFC Do?
BFC is a Southern California-based CDC that issues the debenture guaranteed by the SBA. BFC offers solutions to local businesses by helping small business owners qualify for the SBA 504 loan; this helps spur commercial real estate growth by empowering businesses that want to purchase commercial real estate. For commercial real estate developers, our presence makes Southern California a ripe ground for closing deals because local businesses have access to funding to purchase properties.
We have a team of experts that helps commercial property buyers structure their loans through BFC’s SBA 504 loan program, increasing their chances of approval while presenting them as low-risk borrowers to banks and ensuring they get better interest rates. For Commercial Real Estate developers, this means faster and easier closing on commercial property deals.
What are the Advantages of Using BFC’s SBA 504 Loan Structure for Your Commercial Real Estate Development Project?
SBA 504 loans are crucial in helping businesses think big about their commercial property ambitions. Whether you’re constructing a new commercial property, buying an existing one, or renovating your current commercial property, an SBA 504 loan from BFC can go a long way in helping that dream come true.
- Working with BFC significantly increases the chances of qualifying for the 504 loan.
- The SBA 504 loan is a long-term, fixed-rate loan that is backed by the government for up to 40% of the cost.
- The SBA 504 loan can be used for various commercial property projects including hotels, daycares, retail buildings, and office complexes.
- The loan can be used for owner-occupied properties where the owner occupies at least 51% of the building.
With BFC, you can get professional, expert support and advice on structuring your 504 loan to increase your chances of approval and present yourself as a low-risk borrower to lenders, getting your more favorable rates.
Learn whether your properties are eligible for the SBA 504 Loan and how you might use them to increase your customer base.