Business Insights: Top Three Tips for Small Businesses Applying for an SBA 504 Loan
The SBA 504 loan program is one of the most popular financing programs offered by the Small Business Administration (SBA). This lending solution provides a long-term, fixed rate for small business owners to buy, build, or refinance major fixed assets – such as owner-occupied commercial real estate, equipment, and heavy machinery. The 504 borrower-friendly terms include:
- Low down payment – up to 90% financing for established businesses, freeing up capital to reinvest in the business
- Below-market interest rates – lower and more affordable monthly mortgage payments, preserving capital
- Long-term rates 10 (typical for equipment purchases), 20 or 25 year fixed – no surprise balloon payments, offering predictability
For small businesses interested in an SBA 504 loan, here are three tips for the application process:
Know your numbers and need
When applying for an SBA 504 loan, the first step is to know how much capital is needed. Directly tied to the amount requested, is how much capacity a borrower has. Capacity is based on comparing cash flow to current required debt service plus the new proposed debt. The key is to have enough cash flow to cover both existing debt and the new project.
A successful applicant can clearly explain how the new funds will be used and how it will benefit the small business. Is it to create a new product line? Buy a second location? Purchase state-of-the-art equipment? Access cash through refinancing to support operating expenses? These options are all possible through the SBA 504 program.
Also, be sure to provide a detailed business plan and realistic financial projections to support the loan request.
Provide complete and accurate documentation
One of the top reasons loans stall in the application process is because of incomplete or inaccurate documentation. The more quickly a borrower provides the required documents, the faster a project will progress toward funding.
Key documents 504 borrowers should have prepared include:
- Last three years corporate tax returns for business and personal federal income tax returns
- Interim financial statements (within 90 days)
- Schedule of existing company debt
- Most recent aging of accounts receivable and payable
- Two-year income and expense projections
- Borrower’s personal financial statement
Be up front with your lender
The SBA 504 program requires three key players – a small business borrower, a Certified Development Company (CDC), and a third-party lender (i.e. bank or credit union). CDCs, like SomerCor, are nonprofit corporations that originate and service 504 loans on behalf of the SBA.
Both the CDC and third party lender review financial documents and underwriting the loan. If there are any negative elements that may impact creditworthiness, such as bankruptcy or pending litigation, be forthright with that information. This allows an opportunity for the underwriters to learn about the business and provide guidance that may mitigate weaknesses.
Connect with a member of SomerCor’s loan origination team to see how the SBA 504 loan can help your business or your small business client.