Introducing the New 25-Year 504 Loan Term: What It Means for Borrowers

You may have noticed that the Small Business Administration (SBA) 504 loan now has a 25-year option. 

This new loan product joins the 10- and 20-year term loans that have been around for over 30 years. Everything else about the 25-year loan will be familiar to you: it still offers low down payment, below-market rate, full amortization.

Why a 25-Year 504 Loan Is Good News for Businesses

The commercial lending market has changed a lot since the 10- and 20-year 504 loans were first introduced. For example, longer terms have become much more common. A 25-year commercial loan was a rarity at one time, but no longer. So the SBA is catching up with the times. The new 504 loan option means that your 504 loan is more likely to match the term of the partner bank or credit union.  

The biggest advantage for borrowers is that a longer term means lower monthly payments, giving you more money to work with in your daily operations. As SBA head Linda McMahon put it when announcing the new product, “This increased flexibility in their loan terms will put [business owners] in a better position to manage their capital and face challenges like rising operating expenses.” Lower payments also mean that the loan is more affordable, and so more businesses can qualify for it.

A 504 loan is made up of three parts. A conventional lender provides 50% of the total project cost and receives first lien position. A Certified Development Company like TMC Financing provides up to 40% of the total cost, up to $5 million ($5.5 million for qualified manufacturing projects or those eligible for the Green Energy Program). You, the borrower, provide 10-15% as a down payment.

Let’s use TMC’s SBA 504 Loan Calculator to look at the difference a longer loan term can make on loan payments. We’ll assume a 504 loan that looks like this:

 

 

Total loan amount $2,000,000
Conventional loan amount $1,000,000
Conventional loan term 25 years
Conventional loan rate 6%
Down payment $200,000
SBA loan amount $800,000
Estimated SBA fees (included in loan) $20,000

 

We’ll look at two SBA loan terms—20 years and 25 years. Interest rates generally increase slightly with longer terms, as you are paying to use someone else’s money, and it costs more to keep it longer. Even so, a five-year difference will make a big difference on your cash flow, as can be seen below:

20-Year SBA 504 Loan

25-Year SBA 504 Loan

SBA interest rate

5.31%

5.48%

Total monthly payment

$11,997

$11,469
(for the first 20 years, then decreasing to $6,444 for the final five years)

Monthly difference

–$528
(for the first 20 years)

Annual difference

–$6,336
(for the first 20 years)

An additional $528 in your budget every month for 20 years can make a big difference for your business. Having that extra money available at the beginning of the loan will make your business more stable and give you the opportunity to meet long-term expansion goals more quickly.

Other Benefits of the 504 Loan

The 504 loan is designed to be flexible and to meet the needs of most small businesses. It is fixed-asset financing. This includes:

  • financing commercial real estate, e.g. land or buildings
  • constructing or upgrading buildings
  • purchasing large equipment
  • refinancing commercial real estate mortgages

The 504 loan has a fixed, below-market rate and is fully amortized, so you don’t have to worry about a balloon payment. The vast majority of American businesses are eligible for the 504 loan, and loan approval takes about the same amount of time as a bank loan. Prequalifying for it is fast—often less than 48 hours—and simple, and typically requires just a few documents:

  • Three years of personal and business tax returns
  • A personal financial statement
  • Interim financials

The new 25-year term is one more way the 504 loan meets the needs of growing small businesses. You can find out more about the advantages of the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender, and has funded projects worth more than $9 billion across California and Nevada, resulting in the creation of an estimated 60,000 jobs. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.

Kurt Chambliss

Kurt Chambliss

Kurt Chambliss is Executive Vice President of Sales and Marketing for TMC Financing, focused on serving small business clients throughout San Francisco’s East Bay. With over 16 years of SBA 504 lending industry experience, Kurt seamlessly guides clients through the loan process helping to secure SBA financing for small businesses and introducing them to the best first mortgage lenders that meet the clients’ needs, supporting them through the entire process. Kurt acts as an advocate for small business owners, and is passionate about helping small businesses grow and succeed.
Kurt Chambliss