Banks Want You to Utilize Conventional Loans
The SBA 504 Loan has often been in the shadows of the other SBA loan program, the 7A. It’s unfortunate, but frankly, it’s part of human nature. Most providers of commercial loans in America are banks, occasionally credit unions, non-bank lenders, etc. Most people want to do what’s easiest for them, which is provide their conventional product. Unfortunately, that doesn’t always work for business owners.
A conventional commercial loan is probably 70-80 percent loan-to-value financing. That means a lot of down payment from the business owner. It may not be practical or economical in those cases. A business owner shouldn’t have to liquidate many accounts to come up with that kind of a down payment.
You’re Steered Toward The 7A
They may say, “What other low down payment programs do you have?” Oftentimes, the bank or the credit union will bring up a competing SBA product called the 7A. Now, the 7A is a great loan for certain proceeds. Business acquisitions, partner buyouts and debt consolidation would all be practical uses. But probably not the best loan for commercial real estate.
Most 7A loans are floating rate loans, and commercial real estate is fundamentally a fixed asset. So you have a mismatch in terms of how you’re financing that asset. Also, the 7A requires extra collateral and not just what you’re financing. In the case of real estate, you may have to pledge a second mortgage on your home or pledge your inventory and receivables.
There’s a lot more that goes into a 7A loan because it’s required to be a fully collateralized loan. The 504 loan does get brought up when the project is bigger than $5 million because the 7A has a cap at $5 million right now. Only in those cases where it’s real estate and/or a heavy equipment transaction will a bank or credit union bring up a SBA 504 loan.
Ask About The SBA 504 Loan
If it weren’t for some of the marketing efforts and educational efforts, there wouldn’t be as many people that know about the SBA 504 loan. I always argue if you’re a bank or credit union, put all three options on the table. The business owner is going to choose the SBA 504 loan. They may do the 504 loan for the real estate and have a companion 7A loan for the working capital piece. That makes a lot more sense for most business owners than to do a SBA 7A loan or try and do a much lower term, much higher down payment conventional bank loan.