Financing Small Business Growth With a 504 Loan

Posted on | by Barbara Morrison

you can finance your small business with a 504 loan

Securing funds to finance your small business’s growth can be time consuming and complicated, and the end results can often prove insufficient. Thankfully, the Small Business Administration (SBA) developed the 504 loan program, which offers a more affordable and accessible way to grow your business. How can you take advantage of this loan to reach your company goals, and how can a Certified Development Company (CDC) like TMC Financing help?

Grow Your Business Through Owning Your Own Building(s)

With a 504 loan, you can buy a property—and customize it, if necessary—to build equity and ensure that you are adequately meeting consumer demand. Owning your own commercial real estate can benefit you and your business in a number of ways:

  1. Your investments positively impact you, not your landlord. When you make upgrades to a property, you want to be the one to benefit from those investments in the long run. If you are leasing a building, any changes you make to increase the value of the rental property will ultimately benefit the landlord. This becomes especially problematic when the outlays for rent and improvements exceed the cost of a mortgage, so you’re paying more and getting nothing in return.
  2. You gain equity. Equity that comes from buying a building can be monetized to fund further expansion of your business, or can be used towards your retirement strategy. Sadly, only a fraction of American entrepreneurs are prepared for retirement. Small business owners are primarily concerned with growing their business and tend to put most of their earnings back into the business, rather than pay themselves a big salary or save for their own future. Renting out your building, or selling it, once you retire, can provide a substantial nest egg for retirement.  
  3. You can be more secure in your location. If you are concerned about staying put as the neighborhood changes around you, buying your current location is the way to do it. This protects you against rent increases or displacement that may result from rising property values and greater competition on the real estate market.
  4. You can expand into secondary locations or build a franchise. When small businesses are doing well and demand for their product is growing, accommodating that growth may necessitate additional space. Purchasing or constructing new facilities will complement your present operations.

Grow Your Business Through Equipment Upgrades

Your success also depends on having the right equipment. Whether you need to update your machinery to ensure continued quality, or you need additional equipment to increase production efficiency, a 504 loan can help.

The 504 loan lets you purchase equipment with a long (10+ years) service life, whether or not you purchase real estate at the same time. The range of equipment covered by the 504 loan is broad, and can be highly specialized to specific industries, including:  

  • Manufacturing equipment
  • Food processing machinery
  • Medical & dental equipment
  • Lab & technical equipment
  • Gym & fitness equipment
  • Laundry & dry cleaning equipment
  • Hotel furnishings and fixtures

When thinking about equipment upgrades, keep in mind the SBA Green Energy Program. If you install equipment that reduces energy consumption by 10% or produces renewable fuel to reduce consumption by 10%, you become eligible for more  504 loans and a larger loan amount.

How an SBA 504 Loan Works

Let’s look at the 504 loan process in detail. You obtain a 504 loan through a Certified Development Company (CDC)—a nonprofit organization set up specifically to administer the 504 loan program and help small business owners navigate the qualification and payment process.

The loan itself is a partnership between you, your CDC, and a conventional lender, such as a bank. It comes in three parts:

  • The first is a loan from a conventional lender for 50% of the total amount. You and that lender determine the conditions of that loan, including the amount. This part of the loan is your first mortgage.
  • Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, with a 10- or 20-year term and a fixed, below-market rate. (You can receive up to $5.5 million for manufacturing projects or projects eligible for the SBA’s Green Energy Program.) This will be your second mortgage.
  • The borrower contributes 10% to the loan. Certain types of facilities however are classified as single-purpose properties by the SBA and require a 15% down payment.
  • 50% Conventional lender
  • 40% CDC
  • 10% Borrower

If financing your small business’s growth is the next step in your entrepreneurial journey, the 504 loan is an accessible and affordable option. You can find out more about it 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.

Barbara Morrison
Barbara Morrison
Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison
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