Calculating Your Manufacturing Company Expenses: What A 504 Loan Can Help You Pay For

how a 504 loan can help your manufacturing businessManaging the costs of a manufacturing operation can be one of the biggest challenges that business owners face. While the equation is simple enough – add together the cost of materials, labor and overhead – the reality is that there are many variables that go into calculating these costs. Fluctuating prices on materials, for example, can lead to significantly higher manufacturing costs. Seasonal labor during high demand periods can be another factor that makes it difficult to consistently calculate costs.

Small and medium-sized businesses are much more susceptible to variances in costs than larger manufacturers, making the business owner’s job even more difficult. Large companies often have greater access to capital to buy property and equipment, and they have deeper pockets to stock up on materials to get bulk pricing than their small business counterparts do.

Overhead Costs Are Complex

There are many elements to overhead costs. Overhead includes just about every cost that is not labor or materials; support staff, utilities, taxes and countless other indirect costs must be tallied and included in the cost of production. The Internal Revenue Service compiles tons of data on business tax filings, which are available online. A quick review of the latest-available data found that, for manufacturers with $1 million or less in sales, cost of goods and labor costs are by far the biggest expenses, but rent is also a major line-item.

Source: Analysis of IRS data.

Loans as an Equalizer

With all of these costs, many small businesses are challenged to keep up with expenses while concurrently growing their revenue. A small business loan is great for companies looking to improve their bottom line. A new, more efficient piece of equipment can equate to greater profits. Likewise, buying materials at a volume discount from a vendor reduces the cost of every item produced, which can lead to better margins. Businesses can leverage loans to level the playing field and ultimately lower manufacturing costs.

There are a variety of loans that businesses can utilize to help finance their business, but the Small Business Administration’s 504 Loan Program is ideal for manufacturers looking to buy equipment and/or modernize, expand, or purchase manufacturing facilities. A 504 Loan provides borrowers with long-term, fixed rate financing, and requires a smaller contribution from borrowers than other loan types.

Purchasing a Building

A real estate purchase is often thought to be cost prohibitive for many small businesses, so they tend to rent for an extended period of time, losing out on the opportunity to earn equity in a property. Rent follows cost of goods and labor as one of the biggest line items on companies’ books, but businesses sometimes forget to calculate the cost of space into their manufacturing costs because they don’t associate functions like administration and warehousing with production. Buying a building enables a business to gain a significant asset while removing rent from the extensive list of overhead costs.

With the cost of rent making up  5% of total expenses, manufacturers should consider investing in their property to lower costs and add long-term equity. A 504 loan is an ideal solution for financing a building for a number of reasons:

  • A 504 loan requires that the business contribute only 10 percent of the project cost; this is lower than many banks’ traditional commercial mortgage down payments.
  • Interest rates are fixed and loans are long-term, which stabilizes occupancy costs. Not having to renegotiate leases every few years and hope that rent doesn’t skyrocket is a welcome relief for business owners and their accountants alike.
  • Long term loans give owners up to 20 years to increase the value of the property and add equity.
  • Tax benefits are another consideration for businesses to invest in real estate, and the 504 loan makes it easier to access these tax benefits by making real estate purchase more affordable. Maximizing deductions is complex, however, and business owners should absolutely consult with an accountant after buying property.

Using Loans to Offset Other Costs

Proceeds from a 504 loan cannot be used towards working capital or to buy materials for inventory, but they are very useful to offset other costs that will free up cash for these purchases. For example, a company can finance the purchase of equipment that they would have otherwise used cash for. This cash can then be put back into the business and used for other expenses or purchases.

Offsetting costs can be a balancing act for businesses, as they weigh the value of a new piece of equipment that will increase productivity with the cost of the equipment. Moving longer-term expenses, like equipment purchases or facility expansions, to a loan frees up capital to focus on short-term expenses that can result in lower costs and higher productivity.

Structure and Restrictions on 504 Loans

SBA 504 Loans are made through Certified Development Companies – entities that partner with the Small Business Administration to facilitate these loans. Certified Development Companies (CDCs) are focused on not only helping small businesses get financing, but on improving local economies through job creation. Many manufacturers who utilize the 504 loan program must commit to creating or retaining one job for every $100,000 borrowed. However, certain CDCs, such as TMC Financing, meet this job requirement on a company-wide level, and therefore each borrower is not required to hit this mark individually.

CDCs work with banks and the SBA to provide financing of up to 90 percent. The lender provides 50 percent of the loan, while the Small Business Administration provides 40 percent; the borrower contributes the other 10 percent. In some cases, a 15% down payment may be required, such as if the company is a startup or the property being purchased is a single-use property.

The 504 loan can be used for:

  • The purchase of existing buildings
  • The purchase of land and improvements
  • The construction of new facilities or modernizing, renovating or converting existing facilities;
  • The purchase of long-term equipment
  • Refinancing conventional mortgage debt  

Choose Your Lender Wisely

Many business owners may turn to a national bank for their financing needs, as these are brands that advertise and have millions of customers. The fact is that big banks lag well behind other lenders in the percentage of small business loan applications that they approve. The latest Small Business Lending Index found that big banks approved less than a quarter (24.3%) of small business loan applications. Small banks, in contrast, approved nearly half (48.7%) of applications. Turning to your local bank can mean a greater likelihood of getting the loan that you need. At the same time, working with local banks reinforces the idea of community development. In addition, working with a CDC increases your chances of getting approval from a conventional bank, since it’s less risky for them.


SBA 504 loans are a great solution for growing manufacturers looking to stabilize their occupancy costs. Companies can achieve increased capacity and production by buying better equipment or purchasing a space better suited for their needs. 504 loans are designed specifically for these scenarios, enabling small business owners to get accessible and affordable funding with as little as 10% down. If you are a manufacturer looking to expand your business, the 504 loan program will be right for you!

You can speak to a TMC Financing loan expert to find out more about the SBA 504 loan program. TMC Financing is a Premier Certified Lender with the SBA, which gives us increased authority to approve, process, close and service loans quickly. Our responsive, expert staff is ready to help every step of the way.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison