One aspect of owning and operating a business that is overlooked by many, excluding the small business owner of course, is how much equipment purchases can upset your cash flow. Many businesses require up-to-date, reliable and quite often expensive pieces of equipment to keep their business running smoothly. Luckily, there is a solution for equipment financing for small business owners, right at your fingertips.
The SBA 504 Program is a financing option for small to medium sized businesses. It was created by the Small Business Administration (SBA) to help our small businesses thrive and expand. Many people who are aware of the 504 Program are probably also aware that it is commonly used for the purchase of real estate. However, a lesser known fact is that the 504 loan can also be used for equipment financing for small business owners. Most for-profit businesses qualify for the program and the terms are more favorable than any other equipment financing options for small business owners.
Lease vs Owning Your Assets
Just like with real estate, you often have the option of leasing or buying equipment for your business. Because the service life of a piece of equipment can range from a few years to many decades, and the price range can be just as vast, your equipment financing strategy is highly individual.
Short-term leasing is a decent option for equipment that will become outdated very fast, such as certain medical equipment, high technology equipment or anything that is used so intensively that it wears out quickly. You can take it, use it and return it.
Buying equipment may make more sense for equipment with a long service life and equipment that holds value. It is cheaper in the long run and offers flexibility plus equity. There are also tax benefits that could make purchasing equipment a more viable option. Consult a tax expert while planning your equipment acquisition to get the full details on tax deductions and depreciation.
Whatever direction you choose, it is important that your lease or loan have a term that is no longer than the service life of the equipment. Otherwise, you will find yourself still paying for old equipment while you are financing its replacement.
While buying business equipment may sound appealing, the higher initial costs may deter some business owners. However, with the SBA 504 loan, business owners can purchase equipment with a minimal down payment.
Why the SBA 504 Program is the Best Option for Financing Equipment for Small Business Owners
The SBA 504 Loan is not the only option for equipment financing for small business owners, but it is often the best option. You may find a bank that will offer financing that sounds appealing – but most will come with either a balloon payment, a high interest rate, often variable, or a high down payment. The chance of getting a conventional bank loan will depend on how qualified of a borrower you are.
There are also online lenders that will provide quick and often easy access to funds. But their interest rates are high, terms are short, and hidden fees are common.
The SBA 504 Program offers 90% equipment financing for small business owners. Highlights of the 504 loan include:
- A below market, FIXED interest rate
- Long terms of 10, 20, and 25 years
- 10% down payment
- No additional collateral required
- No appraisal required
- Can include tax, shipping and installation in financing package
Uses and Structure of the SBA 504 Loan
SBA 504 funds can be used to purchase equipment with a service life of 10 years or more. Some examples of equipment ideal for 504 financing include:
- Manufacturing equipment
- Commercial printers
- Food processing machinery
- Medical/dental equipment
- Lab and technical equipment
In addition to equipment and machinery purchases, a 504 loan can also be used to:
- Purchase real estate, including land or a building
- Construct, upgrade or renovate buildings
- Refinance conventional debt
The 504 loan is issued in a partnership between a conventional lender (a bank or credit union) and a Certified Development Company (CDC) like TMC Financing that administers the SBA portion of the loan. A 504 loan has three parts:
The first is a loan from a conventional lender for at least 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage. If you do not have a conventional lender already, TMC can help match you with the perfect banking partner for this loan.
Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Manufacturers or projects that implement green efficiencies can receive up to $5.5 million. This is your second mortgage.
Finally, you, the borrower, contribute 10% to the loan as down payment.
Because the conventional lender receives first lien position, the loan is a low risk for them, which makes you a more attractive borrower. The 504 loan has term options of 10, 20 years, and 25-year loan terms. The 504 loan never has a balloon payment.
How to get Started
If you are a small business owner and think you could benefit from an SBA 504 Loan, TMC Financing is happy to consult with you to make sure you qualify and to work on the best loan package for you and your business.
TMC Financing is a Certified Development Company (CDC) that administers SBA 504 Loans on behalf of the SBA. We guide small business owners through the entire loan process and work with the SBA on getting their loan approved on their behalf. TMC has worked on projects worth over $9 billion across California and Nevada, benefiting over 5,000 small businesses. Contact us with any questions or to get started in the loan process.