SBA 504 Loans and Commercial Real Estate: An Inflation Hedge for Small Businesses
Savvy investors understand the value of real estate as an inflation hedge, but as a small business owner, did you know that you can also benefit by purchasing your commercial property? In this article, we look at what it means for commercial real estate to be a hedge against inflation and how you can use a Small Business Administration (SBA) 504 loan to purchase your commercial property, creating stability for your business today and building a stronger financial future, too.
What’s an inflation hedge?
With today’s high inflation rate – currently, it’s on pace to exceed 7% in 2022 – nearly everything you pay for, including rent for your small business, actually costs more, while every dollar you save is worth less due to inflation. For example, you’d have to earn at least $107 this year for every $100 you earned last year just to keep up. That’s what’s known as the “corrosive” effect of inflation.
That’s why in times of high inflation, you’ll hear about opportunities to hedge against it through investments. Simply put, when something is a hedge against inflation, it means that over time, the value of the asset increases more than the rate of inflation over the same time period. For some types of assets, like government-issued bonds, the benefit comes when an investor earns more in interest than the rate of inflation. With commercial real estate, there are multiple ways to benefit from owning property, including as a hedge against inflation.
Why buy your business’s commercial property?
Commercial real estate investors know that properties are good inflation hedges because they can increase rents annually, which keeps the income they make from their properties ahead of inflation. For example, if inflation rates are typically about 3% annually and a landlord raises rent by 5% annually, then the income from the property stays ahead of the corrosive effect of inflation. That, coupled with the likely increase in the overall value of the property, means that landlords enjoy multiple financial benefits.
Clearly, though, this is bad news for you if it’s your business that’s paying those annual rent increases.
That’s one of the key reasons why, if you’re currently renting space for your small business, you may be better off buying your property.
Get even more benefits when you buy your commercial property
Although the actual benefits vary by location, use and other considerations, commercial real estate is proven to be an excellent long-term investment and inflation hedge. And with the right funding, you have control over your business’s long-term real estate costs; conversely, if you lease your space, your landlord controls rent increases and eventually could outprice you – a challenge that small businesses face every day.
In fact, as the owner of your commercial property, you can benefit in at least three ways:
- By securing a fixed-interest mortgage, your monthly principal and interest payments stay the same over the life of your loan (as opposed to rent payments, which likely increase annually, or variable-rate loans, which can fluctuate with interest-rate increases).
- The long-term investment benefit of owning an asset that increases in value over time, including potential tax benefits.
- The ability to rent additional space in your building to generate regular income or to eventually sell your property and earn a lump-sum payout.
SBA 504 loans: Own your building to hedge inflation and secure your future
For small businesses, the SBA 504 program is one of the most advantageous ways to finance commercial real estate purchases and new construction. It’s also designed to help business owners who may not qualify for conventional commercial real estate loans or who may not have enough equity available to meet conventional owner-equity requirements.
Key advantages of the SBA 504 loan program:
- Owner-equity requirements are as low as 10% down, compared to 20-30% for conventional loans.
- Below-market, fixed interest rates with payments fully amortized over 25 years, so monthly principal and interest payments won’t change over the life of your loan.
- SBA 504 loans are available up to $5 million (and up to $5.5 million for some projects), with no maximum project amount, so you can get the funds you need to realize your dream. SBA 504 loans are made in partnership with banks, certified development companies (CDCs) and business owners. SBA 504 loans can be used to finance up to 40% of a project’s total costs, with owner equity – typically 10% of the total – and bank financing covering the rest.
- There’s no additional collateral required when SBA 504 loans are used to purchase or construct commercial property for your business.
TMC can help with an SBA 504 loan
If your small business is located in California, Arizona or Nevada, TMC can help you secure an SBA 504 loan. Even if you’ve never considered that you could buy your current commercial building, acquire a different building for your business or even construct the property of your dreams, take a look at our success stories, then contact us today and let us show you all of the ways that an SBA 504 loan can help you hedge against inflation today and build security for tomorrow.
TMC Financing is a non-profit CDC with a mission to promote economic development and job creation for small businesses in California, Nevada and Arizona. Since 1981, TMC has secured more than $10 billion in SBA 504 commercial real estate financing for 6,000 small businesses.