The SBA 504 Loan has lower down payment requirements and also provides 20/10 year fixed rates. Having fully fixed rates reduces the risk of rate volatility over the life of the loan which provides certainty and makes the 504 loan a competitive alternative.
By putting less money down, the business is able to save liquidity and reinvest that within their firm. Putting 20% down can be cost prohibiting for many small businesses.
The following table depicts a comparison between the SBA 504 Loan and a conventional loan:
|
SBA 504 Loan |
Conventional Bank Loan |
| Loan Amount |
Up to 90% financing (inclusive of land, construction / renovations, soft and closing costs) |
60% to 80% financing (depending on the property type) |
| Equity |
As little as 10% of the total project costs |
20% to 40% plus closing and soft costs |
| Term |
10 or 20 years fixed (no balloons or rate variability) |
3, 5, 7 or 10 year balloons |
| Amortization |
10 or 20 years |
Typically 20 years |
| Pricing |
Fixed for the full term indexed off of the 10 year treasury yield |
Variable or fixed for the term of the loan |
| Personal Guarantees |
Required by 20% or more owners |
Typically Required |
| Prepayment Penalty |
For the SBA loan there is either a 5 or 10 year prepayment |
Varies by lender |
| Fees |
Overall costs are typically 1.5% of the total project cost with the ability to finance the majority of the costs |
Typically 1% of the loan amount |
| Personal Credit Scores |
No specific requirement; however, lower scores will require thorough explanation |
Varies by lender |
| Economic Development / Public Policy Requirement |
Required for all SBA 504 Loans |
Not a requirement |
The following table depicts a comparison between the SBA 504 Loan and the SBA 7(a) Loan.
|
SBA 504 Loan |
SBA 7(a) Loan |
| What is primarily financed? |
Real estate and heavy equipment
Refinance of commercial debt associated with prior real estate or equipment debt |
Working capital, inventory, equipment, stock, or any other business asset and/or debt to be refinanced |
| Why is the program typically used? |
Low down payment and long term fixed rates |
Ability to enhance credit, low down payments, mitigate collateral shortfalls |
| Loan Structure |
1st mortgage made by lending partner
2nd mortgage SBA / FBDC loan |
Typically a single loan made and serviced by a 7(a) provider |
| Loan Size |
$150,000 – $25 million |
$150,000 – $5 million |
| Interest Rate |
1st mortgage: conventional pricing
2nd mortgage: below-market fixed interest rate |
Typically floating at WSJ Prime +1% up to WSJ Prime +2.75% |
| Term |
1st mortgage 10 year (minimum)
With 20-25 year amortizations
2nd mortgage 10 or 20 years, fully amortizing |
Up to 25 years, fully amortizing for real estate
Up to 10 years, fully amortizing for all other uses |
| Prepayment Penalty |
For the SBA loan there is either a 5 or 10 year prepayment |
Typically a 10 year declining prepayment |
| Fees |
Overall costs are typically 1.5% of the total project cost with the ability to finance the majority of the costs |
3% guarantee fee based upon the entire project amount |
| Additional Collateral |
Not a typical requirement |
Required when the equity in the project is less than 15% of the project |
| Personal Credit Scores |
No specific requirement; however, lower scores will require thorough explanation |
Varies by lender |
| Economic Development / Public Policy Requirement |
Required for all SBA 504 Loans |
Must meet SBA’s 7(a) size standards |
