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How a 504 Loan Could Save Your Small Business

How a 504 Loan Could Save Your Small Business

By Julie Chambers Loan Operations Manager, First Service Bank

Imagine that your small business workshop burns down. Maybe you find a way to keep running your operation, but you know it’s not sustainable.  And then there’s the challenge of paying your 12 loyal employees – plus the eight new hires you planned on adding to the payroll. It may feel hopeless, but all is not lost. There’s a low-interest, low down payment, term loan you can secure. It’s the 504 Loan from the Small Business Administration. If you’ve never heard of the 504, you’re not alone.

While the 504 Loan has been around since 1958, it’s hardly well-known. As anarticle in the Wall Street Journal once noted, “simply put, the 504 suffers from an identity crisis. The loan program is a potent tool for small-business owners, yet the program is vastly underutilized, in large part because many entrepreneurs don't even know what it is.” 

We saw that identity problem clearly in 2020 during the pandemic when First Service Bank began taking applications for the 504 Loan. In that period, many of our small business customers found themselves in need of flexible financing for reasons totally out of their control. Each time we brought the loan to their attention, we got one of two reactions: they’d never heard of it, or they assumed it was super complicated because it was government-issued. But as soon as we showed them what could be accomplished with the 504 Loan, we saw instant relief in their eyes. 

Remember that burned down workshop I mentioned in the opening of this article? It happened in Hot Springs to a local cabinetmaker, a family-owned business that had been in operation here since 1985. In 2018, after a lightning strike, $2 million in equipment were destroyed, not to mention the buildings that housed it.  

The 504 Loan saved that cabinet shop, just as it did for a local used auto dealer who was told they were losing their lease. In that case, the loan helped the owner purchase his building outright and continue his operation. The 504 Loan program also allowed another First Service Bank customer to purchase a new facility that created an opportunity for expansion and customized operations that wasn’t possible in the formerly leased facility.  

Key Facts About the 504 Loan

But what is the 504 Loan exactly? Very simply, the loan provides long-term, low fixed rate financing of up to $5 million. The funds can be applied to major fixed assets such as building or upgrading structures, equipment, machinery, utilities, etc. with the goal of promoting business growth and job creation.

The 504 Loan not only offers attractive interest rates, but a small business can borrow up to $5,000,000 with only minimal equity. For existing businesses that translates to as little as 10% equity. For new businesses, as little as 15% equity. Compare that to the typical 30% equity required for other types of commercial loans.

To help you understand what a 504 Loan is and how it works, we’ve put together the key points below:

How is a small business defined?

The Small Business administration uses several numerical factors to define a small business. Because the SBA works with such a variety of industries, there are several definitions regarding size of staff, type of industry, annual income, and more. But the common denominator is having a net worth of under $15 million. 

Who can qualify for a 504 Loan?

To be eligible for the SBA 504 Loan, a small business applicant must meet certain requirements. The business must be:

  • An operating business that meets the definition of a small business

  • A for-profit business

  • Meet the SBA definition of a small business

  • Located in the United States

  • Have a net worth of less than $15 million

  • Have an average net income, after Federal income taxes, of less than $5 million for the two years prior to your application

  • Able to demonstrate a need for the desired credit

  • Meet other case-by-case considerations that may apply, such as environmental impacts that may add to the cost of the loan

Who doesn’t qualify?

Nonprofit organizations, life insurance companies, religious institutions, private clubs, and businesses that primarily engage in lending, lobbying or legal gambling cannot receive an SBA 504 Loan.

How can I use the loan money?

 A 504 Loan can be used to purchase fixed assets that “promote business growth and job creation. This could include a new building, equipment, or machinery. You can also use a 504 Loan to build or upgrade facilities, including utilities, streets, or parking lots.

Where does the loan money come from?

 Unlike most loans which come directly from the lending institution, funding for the 504 Loan works by distributing the loan among three parties:

  • A Certified Development Company (approximately 40%).

  • A bank (approximately 50%).

  • The small-business owner taking out the loan (10% - 15%). Under certain circumstances, business owners may need to put down as much as 20%.

How long will it take to get my 504 Loan?

One of the common misconceptions about the 504 Loan is that it takes forever to get your money. Not true. It typically takes less than 60-90 days on average from the time you apply for an SBA 504 Loan to receiving your loan check for your interim loan from the bank. 

How do I pay back the loan?

The 504 Loan can have a term length of 10, 20, or 25 years. Interest rates are tied to the five- and 10-year U.S. Treasury notes, typically around 3% of the amount financed. Fees typically include SBA, CDC, and bank, which vary. These fees become part of the total loan amount, so your only upfront cost is the down payment.

What paperwork/documents will I need to apply for the 504 Loan? 

You’ll need the following documents to apply for a 504 loan:

  • Business and personal tax returns (three years).

  • Business and personal financial statements.

  • Business plan.

  • Accounts payable and receivable.

  • Contractor estimates (for construction loans).

  • Cost documentation (for equipment loans).

  • Other government loans you’re getting

  • Entity documents

NOTE: This list is not exhaustive, and the CDC and bank you work with may require additional documentation to process your 504 Loan application.

Could a 504 Loan help your small business? Let’s talk and find out.

The 504 Loan has many attractive features for small business owners looking to build, expand or upgrade their fixed assets. Knowing that this loan can be attained with less equity down, a significantly lower interest rate, and longer-term lengths than other commercial loans certainly make the 504 Loan worth exploring. 

We know you have a small business to run, so rest assured, First Service Bank is committed to putting funds in your hands quickly and with the least amount of stress for you.  Our loan team would be happy to sit down and discuss how a 504 Loan might benefit your small business. If you’d like to chat with us, please call Darla McJunkins at 501-745-7200 to set up an appointment in person or by phone. We’re here to help!