STRATEGY
SBA 504 Loans: A Case of Dollars and Sense
By Carol C. Brennan
I
s your borrower thinking of buying or nancing alternative for growing compa- package with a lower blended rate, and
building a new facility, or renovating nies and, when used to supplement bank more liberal terms that allow the company
an existing facility, or perhaps pur- financing, create a win-win-win situation. to free up capital for business growth. Typi-
chasing a large piece of capital equip- Here’s how they work. Typically the bank cal projects range in size from $500,000 up
ment? Before making a final financing provides a 50-percent first mortgage, the to several million dollars. On real estate
commitment, consider proposing an SBA SBA provides a 40-percent fixed-rate second projects, fixed-rate financing for 20 years is
504 loan for real estate and equipment mortgage, and the borrower provides a 10- available on the 40-percent SBA piece. The
loans. These loans are an attractive fi- percent down payment. The result: a loan SBA 504 20-year rate for August was 7.3
percent. The term for equipment financing
on the 40-percent SBA piece is 10 years.
Advantages of the SBA 504 over conven-
Bankers like our tional financing for the borrower include:
• Low down payment – Just 10 percent. Lets
the borrower preserve cash for working capital.
Flexibility. • Fixed rate on the SBA 504 portion –
A borrower won’t have to worry about the
prime lending rate going up. They will
know the amount of this mortgage pay-
ment for the next 20 years.
• Long term – SBA 504 loans are for 10
or 20 years. Because the SBA is in a sec-
ond-lien position, the bank doing the 50
percent first-lien loan is typically willing to
lend at a longer term. Longer terms make
the borrower’s monthly payments lower.
• Low interest rate – Even with all the
fees and closing costs included in the rate,
it is still a low rate for a subordinate mort-
gage loan, particularly for small business.
Private Financing to bridge the gap. The blended rate between the bank’s por-
Mezzanine SBA 504 Direct Lending tion and the SBA 504 portion makes the
project affordable for the borrower.
Maine Connecticut New Hampshire The banker wishing to participate as
$1,500,000 in $902,000 for purchase and $700,000 term loan for the 50-percent lender gets to:
subordinated debt renovation of real estate leasehold improvements • earn CRA credits;
and working capital • lend at a lower loan-to-value ratio;
• keep a growing customer happy; and
• have lower risk because the SBA 504
loan is in second position.
Rhode Island Massachusetts Connecticut The community gets the advantage of
keeping or attracting a healthy, growing
$1,050,000 in $3,500,000 acquisition $1,660,000
small business that will be creating jobs
subordinated debt of land and building term loan for debt refinance
and doing other wonderful things in the
community. x
Carol C. Brennan is director of
business development for
THE BUSINESS DEVELOPMENT COMPANY Wakefield, Mass.-based BDC
NEW ENGLAND CERTIFIED New England/New England
Certified, the only premier cer-
500 Edgewater Drive, Suite 555, Wakefield, MA 01880
tified lender for SBA 504
Phone: 781-928-1100 Fax: 781-928-1101
loans in New England.
www.bdcnewengland.com • www.newengland504.com
56 | Banking Solutions 2006