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This month, the Small Business Administration has offered historically low interest rates on SBA backed 504 loans. For the small businesses in a position to capitalize on weakened commercial real estate markets, SBA 504 loans can be a good source of long term capital. Here are some 504 loan basics.
According to a press release from NADCO, the trade association for Certified Development companies (CDCs), the effective interest rate on 504 loans (including servicing fees) is currently 5.25%. Additionally, recent stimulus legislation that pumped up SBA backing of 7(a) loans also eliminated the SBA borrower's fee from 504 loans.
So, what are 504 loans and what can small businesses do with them?
SBA 504 loans can be used to finance fixed asset projects such as real estate or building purchases, construction projects, renovations, or the purchase of long term machinery and equipment. The funds cannot, however, be used for operating capital or to pay existing debt.
The CDC/504 program aims to enable small businesses, with the help of Certified Development Companies (CDCs), to foster economic development in communities. CDCs are non-profit corporations dedicated to the promotion of small business expansion and job creation.
In the typical 504 project, a private lender covers up to half the cost, 40% comes from a CDC (with 100% SBA backing), and 10% from the borrower's equity. Banks like the deal because the SBA backed portion offers a mitigation of their risk.