SBA 504 Loans

When you are ready to apply for an SBA 504 loan or an SBA 7a loan, please click on the link that will take you back to our home page.  You begin the application process by entering your contact information.  Then you can submit your SBA 504 loan request or your SBA 7a loan request to over 100 different SBA lenders.

Under the SBA 504 loan program, a borrower can finance up to 90% of the purchase of a piece of commercial real estate.  He can sometimes also finance up to 90% of associated heavy equipment he might need for his factory. 

These loans are typically made by  banks, with the assistance of a local Community Development Corporation.  A conventional commercial first mortgage of 50% loan-to-value is made by the bank, and a piggy-back second mortgage up to 90% loan-to-value is recorded concurrently. 

For example, let's suppose a widget manufacturer wished to expand its business by buying an industrial building for $1 million.  The bank would make a $500,000 conventional commercial first mortgage at market rates, typically amortized over 25 years, due in ten years to twenty-five years, and with a fixed rate for at least the first five years.  The bank would record concurrently a $400,000 second mortgage that would eventually be sold to a local Certified Development Corporation and guaranteed by the SBA. 

The buyer would therefore get $900,000 in financing on this building.  He would only have to put $100,000 down.  In contrast, if he applied to a conventional commercial mortgage lender, he normally would only be able to finance $700,000 to $750,000.  Using conventional commercial mortgage financing, he would have to put down a whopping $250,000 to $300,000.

But wait!  It's gets better.  The second mortgage is fully-amortized over 20 years.  There is no balloon payment.  In addition, because the second mortgage loan is guaranteed by the SBA, the interest rate is typically 1.5% lower than the underlying conventional first mortgage.  The borrower gets a blended rate, between the market interest rate on the $500,000 first mortgage and the lower, subsidized interest rate on the $400,000 second mortgage, that is around 1% lower than conventional first mortgage rates. 

But that's not all!  Both loans are also assumable.  The loan fees are also low - typically 1.5 points on the first mortgage and 1 point on the second mortgage.  The SBA 504 loan program is a great deal.  Plus banks actually want to make these loans.

There are some limitations.  First of all, the property must be at least 51% owner-used.  Usually the borrower's credit  score must be at least 600 - but even this is good compared to banks today, who normally require a credit score of at least 680 on conventional commercial real estate loans.

Finally, after adding back depreciation and existing rent payments, the borrower's net income from his business, according to his tax returns, must substantiate enough income to make the proposed new mortgage payment.  The coverage ratio only needs to be 1.0.  In contrast, conventional commercial real estate lenders require a 1.25 debt service coverage ratio.

In order to stimulate more SBA lending, the Federal government recently increased the maximum loan size limit for SBA 504 loans to $5,000,000.  If the borrower is a manufacturer or an energy comany, the maximum guaranteed portion can be as high as $5,500,000.  There is no longer any limit on the size of the underlying conventional first mortgage.