If the small business lending climate today were weather, the forecast would be sunny and mild. Even though small business owners thinking about securing financing this year may not be too happy as they watch interest rates rising slightly, that’s better news than it might seem to be. The rising rates are a sign of a healthy economy, and nothing is better for small business, or small business financing, than that.
Banks Loans to Small Businesses Are Up
From a historical perspective, 2018’s interest rates are not high; in fact, they were much higher for most of the period from 1966 to 2001. But rising interest rates mean that banks are more eager to lend money, because it is more profitable for them to do so. Furthermore, the recent relaxation of financial regulation makes lending easier for banks.
As a result, big banks approved a record-breaking 25.1% of small business loan applications in 2017, according to the Biz2Credit Small Business Lending Index, and the approval rate has continued to rise, reaching 25.5% in February 2018. Meanwhile, small banks approved over 49% of applications in December 2017, and that figure inched up a few base points in the following months as well. Lending by the Small Business Administration (SBA) was also at a record high at $5 billion in fiscal year 2017.
Alternative lenders showed mostly poor financial results in 2017, barely holding their ground with an approval rate that hovers around 56.7%. Biz2Credit CEO Rohit Arora, a prominent and authoritative voice in the small business lending industry, sees them continuing their decline in 2018. But the situation may turn around, at least for some. Major online lender OnDeck, which partnered with JPMorgan Chase bank to form Chase Business Quick Capital, saw losses in the first three quarters of 2017 but returned to profitability in the fourth quarter. It is now predicting “originations [loans granted] to grow at double-digit rates” in 2018.
Other encouraging indicators for small business owners include a soaring consumer confidence index of 130.80 in February 2018, exceeding analysts’ expectations and reaching the highest level since November 2000. The influential index, based on a monthly survey conducted by an independent agency known as The Confidence Board, is carefully studied by government economists and others. It is considered a good indicator of consumers’ willingness to spend money, among other things. Consumer spending accounts for about 70% of the economic activity in the United States.
So even if credit is somewhat more expensive in 2018, it’s becoming easier all around to secure financing. The rising rates are a good reason to make financing arrangements as quickly as possible, however. One great way to do that is by using the SBA 504 loan program.
SBA 504 Loans to Finance Small Businesses
The Small Business Administration (SBA) 504 loan program provides accessible and affordable credit to small business owners seeking to expand their businesses. A 504 loan can be used to:
- purchase land or buildings
- construct, improve or upgrade buildings
- purchase equipment with a service life of ten years or more
- refinance conventional debt
The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender. It encourages lending by conventional lenders (banks and credit unions) by giving them the first lien position, thus providing low-risk conditions for the loan. A 504 loan has three parts:
- The first is a loan from a conventional lender for 50% of the total project cost. The amount and conditions of that loan are determined separately, and it becomes the first mortgage. TMC can help match the borrower with the perfect banking partner for this loan, if requested.
- The CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Manufacturing projects or projects eligible for the SBA’s Green Energy Program can receive up to $5.5 million. This is the second mortgage.
- Then the borrower contributes 10% to the loan as down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment. These include businesses such as hotels, gas stations, medical facilities and vineyards and wineries.
The 504 loan has a 10- or 20-year term, with a 25-year option coming soon. It is fully amortized (so there are no balloon payments).
The lending process can be speeded up by prequalifying for a 504 loan as soon as possible. The only documents required to prequalify for a 504 loan are:
- Three years of personal and business tax returns
- A personal financial statement
- Interim financials
The results of the prequalification are usually available in 48 hours or less. They can tell the borrower how much they can expect to receive in a 504 loan and what size down payment will be needed. Funding a 504 loan usually takes about the same amount of time as receiving a bank loan.
Take advantage of this mild and sunny forecast and make your business dreams a reality. The 504 loan provides flexible and cost-effective financing options designed to help your small business grow. It merits careful consideration when you are looking for a commercial loan.
You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. 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.