SBA Loan Down Payment: Everything You Need to Know

Whether you are a small business owner seeking to renovate your building or buy a new commercial property, a Small Business Administration (SBA) 504 loan could be an excellent resource to get the financing you need.  The 504 loan was specifically created to help small businesses purchase commercial real estate with a low down payment.   Conventional real-estate loans require 20-40% down, however, with an SBA 504 loan the down payment can be as little as 10%!  To better understand the 504 program, let’s examine how the loan is structured and why it can be such an affordable financing option.

What Exactly is an SBA 504 Loan?

Simply put, an SBA 504 loan provides small business financing that is partially guaranteed by the government (the Small Business Administration). The SBA does not directly issue the loan, instead the funding comes from an extended network of SBA approved financial institutions.  What makes this structure unique, is that the SBA will guarantee up to 85% of the loan.  In other words, if the borrower is unable to pay back the approved funds, the SBA will cover the portion they guaranteed.  Without this partial guarantee, banks will often consider lending to small businesses “high risk”. As a result, small businesses who don’t secure loans guaranteed by the SBA often qualify for less-than-ideal terms, such as a high down payment.

Down Payment for 504 Loan vs Conventional Loan

Conventional Loan

Remember,  a conventional loan is not insured or guaranteed by the federal government.   As a result, approval for a conventional loan requires a 20 – 30% down payment to mitigate the bank’s risk.   In addition, a conventional loan can often be short term, have a variable interest rate and possibly a balloon payment. You may also be required to pledge additional collateral like other business assets or your home.

SBA 504 Loan

The 10 percent down payment is one of the best benefits of the SBA 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 a 15% down payment.  Yet in either case, the minimum down payment is significantly less than the 20-40 percent required for a conventional loan.

More Advantages of 504 Program

Long-term, Fixed, Interest Rates

As previously mentioned, a conventional loan may short term with variable interest rates.  Conversely, the 504 program allows borrowers to finance the purchase of their commercial property with below-market, long-term fixed interest rates.  Ultimately, 504 borrowers can hedge against rising interest rates and stabilize their occupancy costs for the entire life of the loan.  Business owners who know their occupancy costs can more easily budget and focus on future financial growth.

No additional Collateral Needed

The only collateral you will need is the asset you are purchasing.

No Balloon Payments!

When a commercial real estate loan entails a balloon payment this means you will have to pay a large sum at the end of your loan’s term OR refinance your loan.  NOT with the 504 loan –borrowers avoid this requirement altogether.

Equipment Financing

In addition to the acquisition of commercial property, 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. Some equipment financing examples include: commercial printing equipment, medical & dental machinery, and gym equipment.

Am I Qualified?

Qualifying for a 504 loan isn’t as exclusive as you might imagine. In fact, one of the best aspects of program is nearly all U.S. for profit businesses for qualify for the 504 loan.  The purchaser must occupy at least 51 percent of the building.  If you are financing the construction of a new building, you must occupy at least 60 percent of the building.

Customized Loan Package From 504 Experts

The SBA 504 loan is administered through nonprofit mission based lenders, also known as CDCs, such as TMC Financing.  A CDC’s mission is to help match you with the loan product that will best support your growth, gain long-term success and create a positive impact on your community. Ultimately, CDCs guide business owners through the entire loan process and act as the owner’s advocate throughout the life of the loan. CDCs can provide a prequalification analysis to small business owners, so they know their purchasing power and can act fast when they find the right opportunity.  A prequalification letter can give you a leg up over other offers. In the competitive Bay Area market, this can make or break a deal.  TMC can complete a letter within 48 hours

About TMC Financing

TMC Financing is one of the nation’s top-ranking CDCs and a Premier Certified Lender with the SBA. If you are thinking about buying your own commercial property, talk to one of our local 504 loan experts. Regardless of where you are in the process—whether you have a building picked out or are just hearing about the 504 option for the first time—TMC Financing can help guide you through the next steps, from the prequalification process through the duration of your loan.