Using the SBA 504 Program to Build Your Business, and Your Bank Account

As a business owner, especially in the recent rough economic and capital climate, you are probably pessimistic about any lender actively lending money to small and medium sized businesses. There is a program however, that is not only actively lending, but is thriving during this current credit crunch. It is the SBA 504 loan program.

The US Small Business Administration’s 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, usually real estate, at below market rates and lower down payments for borrowers. This program’s popularity has surged recently due to the current lack of liquidity. Banks love it, because they need to loan money to make money, and in this risk adverse climate, a government backed loan is just what they want. Borrowers love it because they have access to capital at below market rates, and most of the times are only required to put 10% equity into a deal.

A recent change to the program now allows businesses to use the 504 loans as a refinancing tool, unlocking valuable equity in their real estate that can be used as working capital. Another attractive feature is that a business owner can create a separate real estate holding company that the business pays the rent to for the building. As a business owner, you now become your own landlord, enjoying the benefits of real estate ownership.

To be eligible for a CDC/504 loan, your business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. In addition, a business must occupy a minimum of 51% of an existing structure, or 60% initially of a proposed newly constructed structure. There are other requirements, such as one’s related to job creation, so it is important that you meet with your banker, or a lender experienced with the 504 program to understand if you can qualify.

Many lenders are stating their belief that the 504 program will continue to grow in popularity, and they see this program as the dominant business financing tool in 2012. Keep it in mind the next time you write a rent payment to your landlord.


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