Benefits Include Low Down payment, Fixed Rate, Long-term Repayment
If your small to moderate-size business is leasing any commercial property such as office space, manufacturing or warehousing, you are probably making someone else richer with every rent check you write. Every lease payment brings your landlord a little closer to retirement. Why not build your own nest egg instead? The opportunity to own business real estate has never been greater than right now. For a minimum of 10 percent down, your business can be eligible for fixed rate financing toward the purchase of commercial real estate; and right now, these rates are at historic all-time lows. For many small businesses, a monthly mortgage payment can be equal to or less than a rent payment. SBA’s 504 Program can help you get there.
One of the biggest impediments to growing a small business is the lack of equity when buying a building and/or equipment. Accelerating equity growth is the primary financial goal of most small businesses. It is a fact that operating costs such as property lease payments often slow this growth. Under the SBA 504 loan program, small business owners can purchase, construct or renovate commercial real estate and/or purchase capital equipment and machinery for use by their businesses with the benefit of a small down payment. The program is primarily used for real estate acquisition, but may be used for large equipment as well, and does include some refinance options too.
Often the financing is a “50/40/10” split. The “eligible project” includes the costs to acquire, improve or construct the asset plus most related “soft” costs. A commercial bank loans 50% of the eligible project as a conventional loan in first lien position. A Certified Development Company (CDC – certified by SBA to implement the 504 program) lends up to 40% of the project costs with an SBA loan in second lien position. The final 10% is provided by the business owner. In businesses that are a start-up operation or a special use property, the injection percentage may be up to 20%.
Most Montana businesses will qualify; for profit businesses with a net worth less than $7.5 million, and a net income after taxes of no more than $2.5 million for the last two years (while meeting the general eligibility rules under all SBA loan programs) may participate.
504 loans are generally capped at $5 million and can have a term of 10, 20 or 25 years. The rate is typically below market and is always fixed for the full amortized life of the loan on the SBA portion. Prepayment penalties apply during the first 10 years of the loan. Borrowers benefit from this program because of the small upfront investment of 10 percent and the longer amortization of 25 years. This keeps operating costs predictable and more management. One of the program’s goals is to create economic incentives that stimulate development and growth of the economic base in Montana. The borrower is expected to generate at least one job for every $65,000 funded.
What are the steps to obtaining a SBA 504 loan? First borrowers should contact a commercial loan officer at their current lender. Most Montana lenders participate in the 504 loan program. The loan officer will contact one of the four Certified Development Companies serving Montana. Together, the bank and the CDC will assist the borrower in applying for the program, reviewing the application, and securing the appropriate commitments from the SBA and the bank. The CDC’s goal is to make the application and commitment process as easy as possible and to insure both the lender and borrower receive a timely commitment on the 504 project.
Small businesses that have participated in the 504 program have seen property values appreciate. With forecasts of continued market growth and expansion, the 504 program can help new borrowers achieve similar growth in the equity of their business investments. For more information on SBA’s Programs and Services, go to www.sba.gov or call 406.441.1081.
Montana CDCs and Contact Numbers:
Big Sky Finance 406.869.8403 406.443.3261
High Plains Financial 406.771.9027
Dakota Business Lending 406.760.1002
Capital Matrix 208.383.3473