There are over 168,000 gas stations in the United States, many owned by immigrants, families, and women. Despite their crucial role in the everyday lives of millions of people, gas stations generally do not get the best financing options from conventional lenders. Those looking to get into this industry or expand their already established business will find it difficult to lock down necessary funding.
It is hard to find financing for any small business, but gas stations in particular have even more difficulty. Thankfully, the Small Business Administration (SBA) offers the 504 loan program to gas station owners who are otherwise running on empty. The 504 program was made to help small businesses attain quality financing to fill this gap and promote job growth and economic development, in which gas stations play a significant part. Besides the favorable conditions on 504 loans, you will find experts at Certified Development Companies (CDC), the non-profit organizations that administer the loans, who are knowledgeable and eager to help you find the financial resources you need.
Why Is It Difficult to Get a Conventional Loan for a Gas Station?
Conventional lenders are generally hesitant to finance gas station businesses for a few reasons:
- Accounting issues related to a heavy dependence on cash payments. Tracking cash flow is more complicated when a large amount of your turnover is in cash. Your tax returns have greater weight in the approval process in this case. If your records show a low or decreasing cash flow, it will work against you.
- Environmental concerns (and extremely expensive potential cleanups). Leaky tanks are the biggest risk a gas station owner faces, and cleanup costs can run into the hundreds of thousand of dollars. It’s not a risk that banks are eager to share in.
- The single-use nature of gas station sites. Gas stations are one of those facilities that are expensive and difficult to convert to any other use. That can make them harder to sell and so a bigger risk for crediting.
These kinds of considerations can lead to a low rate of approvals and difficult conditions on conventional loans.
How Does the 504 Loan Do Things Differently?
The 504 loan is administered by nonprofit CDCs. Their mission is lending to business owners who want to purchase land, buildings or long-term equipment or to renovate and upgrade their existing facilities.
The down payment on a 504 loan is 15% for single-purpose properties, including gas stations, rather than 10%. Compare that to the 40% down payment that a commercial bank is likely to ask for.
How Have Gas Station Owners Used 504 Loans to Drive Success?
The 504 loan even covers the construction of a brand new building from the ground up. This is what the father-son team, Behrooz and Ali Mirshafiee, are doing. They received a 504 loan through TMC and are partnering with their cousins Bijan and Amir Dehbozorgi to build a 76 station with a Subway shop in Hesperia, California. The 504 loan financed the purchase of vacant land on Fashion Way and the ground up construction costs of both a gas station and fast food restaurant.
In 2013, Charanjiv Dhaliwal purchased land in Concord, CA to construct an Arco gas station, an AMPM minimarket and a Popeye’s Chicken fast food restaurant with an SBA 504 loan. With years of experience as a franchisee for several gas stations and fast food restaurants, Charanjiv was considered a strong borrower. In addition to this location in Concord, his company owns and operates several other franchises in Berkeley, Fremont, Pittsburg, Oakland, San Lorenzo, and Vacaville. The company has grown tremendously since 2013, they are applying for two more SBA 504 loans for additional locations in 2018.
How Does the 504 Loan Work?
The 504 loan comes in three parts, facilitated by a conventional lender, a CDC, and the borrower. Here’s how that breaks down percentage-wise for a gas station:
- The first loan comes from a conventional lender and amounts to 50% of the total loan. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
- Your CDC facilitates a separate SBA loan of 35% of the total, up to $5 million, for 10 or 20 years at a fixed, below-market rate. You can receive up to $5.5 million for projects eligible for the SBA’s Green Energy Program. This will be your second mortgage.
- Then you, the borrower, will contribute 15% to the loan. This is the down payment requirement on a 504 loan for single-purpose properties.