State of US Economy creates favorable conditions for SBA 504 Loan Program
In a challenging economic climate, the Small Business Administration's 504 loan program has become more attractive than ever.
The United States economy has seen its fair share of ups and downs over the past several years, with the COVID-19 pandemic causing unprecedented levels of economic disruption. Small businesses have been hit particularly hard, struggling to stay afloat amid declining revenues and increased operational costs. In such a challenging economic climate, the Small Business Administration’s (SBA) 504 loan program has become more attractive than ever for small business owners and for financial institutions.
“I like the 504 because it’s really a win-win for the bank and for our clients as well,” said Edward Kinney, SVP of Commercial Lending at Settlers Bank. “It’s nice because a big chunk of the financing is a long-term fixed-rate, so they don’t have the risk of what happens with rates in the future. You know what your payment is going to be every month on that portion of the financing”
The SBA 504 loan program is a financing option designed specifically for businesses looking to acquire, renovate or construct buildings, purchase equipment or machinery, or refinance existing debt. The program offers favorable terms, including low, fixed interest rates and long repayment periods of up to 25 years. SBA 504 loans are structured as a partnership between a certified development company (RCEDC is certified) and a participating lender, with the SBA providing up to 40% of the loan amount.
One of the key reasons why the SBA 504 loan program has become increasingly popular is due to the current state of the US economy. Despite positive signs of recovery, the economy is still fragile, with small businesses facing a number of challenges. Access to capital continues to be a significant obstacle for small business owners, especially those with limited collateral. Some traditional lenders have become more cautious in their lending practices, making it difficult for small businesses to secure financing through conventional means.
“It’s a far less risky loan for us to do because we end up at 50% loan-to-value,” said Kinney. “That makes it really attractive from the bank’s perspective in the long run – plus, it allows us to stay within our limits and lend more to that client.”
By dividing the loan between the SBA (40% of the total loan) and traditional commercial lenders, the SBA involvement reduces the risk for lenders, making it easier for them to extend credit to small businesses. This increased access to capital can help small businesses overcome their financial challenges and invest in growth opportunities, such as expanding their operations, hiring additional staff, or upgrading equipment.
In addition to the favorable lending terms and increased access to capital, the program allows small businesses to finance up to 90% of the total project cost, with the remaining 10% provided as a down payment. This low down payment requirement can be particularly beneficial for small businesses with limited cash flow or equity.
Wesley Walsh, Loan Officer at Business Lending Partners, said that now more than ever, he’s finding that small business owners who are ready to grow, need to keep as much capital on-hand as possible to meet other expenses.
“It is an interesting and uncertain time for small business owners dealing with the dynamics of the financial industry,” said Walsh. “One thing for certain is that low down payments and long-term, fixed rates are incredibly valuable right now to growing businesses.”
With interest rates starting to level out, small businesses can secure financing at rates that are unlikely to increase significantly in the near future. This can provide small business owners with greater financial stability and predictability, enabling them to plan for the long term with greater confidence.
The current conditions of the US economy have made the SBA 504 loan program more attractive than ever for small business owners. With favorable lending terms, increased access to capital, and other benefits such as low down payment requirements and fixed interest rates, the program offers a viable solution for small businesses struggling to secure financing through conventional means.
As the economy continues to recover, the SBA 504 loan program is likely to remain a valuable resource for small business owners looking to invest in growth opportunities and build a more sustainable future.
