What is an SBA 504 loan?
SBA 504 loans enable business owners to buy commercial real estate and other fixed assets at below-market, long-term, fixed interest rates. Fully amortized over 25 years, these payments carry no balloon payment.
You can use loan proceeds to construct new or upgrade existing buildings, purchase equipment (10 yr. life expectancy), or convert facilities to energy efficiency.
SBA 504 loans from TMC feature:
- As low as 10% down, so you can keep your cash working to grow your business. Single-purpose facilities or start-up businesses may require a slightly higher down payment for SBA 504 loans
- Below-market FIXED interest rates with payments fully-amortized over 25 years, no balloon
- No maximum loan amount so it’s flexible enough to meet your needs
- No additional collateral required
- Closing and other soft costs can be added to SBA 504 loans
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SBA 504 Loan Structure
The SBA 504 loan is a second mortgage loan backed by the SBA. The first mortgage is provided by a conventional lender, representing approximately 50 percent of the total project cost. The SBA 504 second mortgage, representing generally 40 percent of the total project cost, has a long-term, up to 25 years, and FIXED interest rate, fully amortized for the full term of the loan.
Using a $5 million loan example, the financing structure would look like this:
- Conventional loan (1st) - $2,500,000 - 50%
- SBA 504 loan (2nd) - $2,000,000 - 40%
- Owner down payment - $500,000 - 10%
SBA 504 vs. 7(a) vs. Conventional
The SBA offers both the 504 and 7(a) loans, each valuable for their differences. The SBA 504 Loan is for the purchase of real estate and other fixed assets, and the 7a loan is more commonly used when working capital financing is needed. The 504 offers a low, fixed rate, while the 7(a) interest rate is variable and often unpredictable. The project maximum of a 7(a) loan is $5M and there is no project maximum with an SBA 504 Loan.
|SBA 504||SBA 7(a)||Conventional|
|Down Payment||10% minimum||10-15% minimum||25-40%|
|Interest Rates||SBA second mortgage at below-market rates, fixed for 25 years||Typically variable; tied to prime||Varies by lender|
|Fees||Included in SBA loan; approximately 2.65%||Paid out-of-pocket; typically about 2.75%||Paid out-of-pocket; approximately 1%|
|Project Size||No maximum||Maximum loan amount $5 million||No maximum|
|Collateral||No additional collateral required||Additional collateral typically required for 90% financing||Typically no additional collateral required|
|Prepayment Penalty||Yes, for first 10 years, declining each year||Yes, typically in first three years||Varies by lender|