Unpredictable or rising occupancy costs can be a huge detriment to a small business and can often stump their growth. Purchasing a building instead of leasing is an incredible option for small business owners interested in growing their business and avoiding rising rents. Fortunately, with the SBA 504 Program you can affordably finance the growth of your small business with a building purchase.
The SBA 504 program is specifically designed to help small businesses buy, construct or improve commercial buildings. It can also be used to buy equipment or machinery with a useful life of at least 10 years. Let’s take a closer look at the benefits of owning a building and the ways in which utilizing a 504 loan can help your business grow.
Benefits of Owning vs. Renting
One of the largest benefits of a real estate purchase is providing your business with a permanent operating location and stabilizing your occupancy costs. Although leasing has a lower up-front cost, over time the expense is significantly more. In fact, a recent study conducted in 2017 indicated over a 15-year occupancy period, leasing commercial real estate costs as much as 86.6% more than buying commercial real estate. Business owners who purchase their building can enjoy predictable mortgage payments without the risk of a lease increases.
When a small business owner purchases a property, they can use the building’s appreciation to fund their retirement. The acquired equity can be a substantial nest egg, providing a wealth of financial options for the future. For example, when a business owner is ready to retire from the business, the building could be sold or rented out. The rent payments could serve as a steady source of income.
Unlike businesses that operate on leased property, tax benefits can be rewarded to small business owners with real-estate assets. This of course is another source of savings that can be repurposed for business growth.
Now that we have covered why it is beneficial for a business owner to finance business growth through a building purchase, it is essential to discuss why the SBA 504 loan is a valuable option for this investment.
Why choose the SBA 504 Loan for Real Estate Purchase?
Low Down Payment
The 10 percent down payment is one of the biggest attractions of the 504 program. In some cases, such as a single use property or if the business is less than two years old, owners may be required to provide 15% down payment. However, in any scenario, the down payment is much less than a conventional loan, which can be as high as 40 percent.
Below Market, Fixed Interest Rates
The interest rate on the SBA portion of the loan is below-market, long-term and fixed. The rate is unaffected by market instability or inflation expectations, which could cause a spike in monthly payments. The 504 loan guarantees fixed, low monthly payments for 25 years, with no final balloon payment.
Ability to Finance Equipment and Fixtures
The SBA 504 loan program also allows business owners to finance equipment and other fixed assets, such as fixtures, furnishings and machinery with a service life of at least 10 years.
Equipment financing examples include:
- Manufacturing equipment
- Commercial printing equipment
- Food processing machinery
- Medical & dental equipment
- Lab & technical equipment
- Gym & fitness equipment
- Laundry & dry cleaning equipment
- Hotel furnishings and fixtures
The 504 loan is assumable, If the owner decides to sell their building, the buyer/new owner would gain the benefit of the below-market, fixed interest rate that came with the original loan.
One of the best aspects of the 504 program is nearly all for-profit businesses are eligible. However, the business must occupy at least 51 percent of the building. If the financing is for the construction of a new building, the business must occupy 60 percent of the building.
The 504 program & Support from Certified Development Company
A Certified Development Company (CDC) is a nonprofit corporation built to support economic development within its community through the SBA 504 Loan Program. CDCs are regulated by the SBA and strive to be the owner’s advocate throughout the life of the loan. CDCs complete the SBA paperwork and guide the business owner through the entire loan process.
Property acquisition through an SBA 504 loan is an accessible and affordable way to grow your business and solidify your financial security later in life. The 504 program provides affordable financing that allows small business owners to invest in their facilities and take control over their occupancy costs. Contact TMC financing a learn to learn more on how a commercial real-estate purchase can enhance your business growth.
TMC Financing is the No. 1 CDC in Northern California and has ranked in the top five CDCs nationwide for two decades. During the past 35 years, TMC has provided over $9 billion in financing for more than 5,000 businesses throughout California and Nevada.
For more information on SBA 504 loans and the local businesses they support, visit tmcfinancing.com.