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Make Sense for Savvy Lenders
SBA 504 loans finance up to 40% of eligible project costs and the participating bank provides a first mortgage loan that is typically for 50% of the project and has first lien position on the asset being financed. The bank loan has a minimum 10-year term on real estate or a 7-year term on machinery and equipment, but you set the interest rate and fees and you establish the covenants.
The bank also provides the interim financing or a bridge loan for the construction phase of the project. When construction is complete, a Certified Development Company (CDC), working with the U.S. Small Business Administration (SBA), then provides financing with an SBA-guaranteed second mortgage that takes a second lien position, pays off the interim loan and provides permanent financing for 10 or 20 years at a competitive, fixed interest rate.
You get a 50% loan to value ratio and you were able to make a loan to a business customer that might not have worked with conventional financing. Additionally, the business borrower gets to retain more working capital and continue to grow the business.
It’s good business practice to present your small business customers with ALL options when they are planning to purchase commercial real estate. Even if they qualify for a conventional solution, the prudence of preserving their liquidity combined with the security of the low, fixed rate on the second lien, often makes the SBA 504 loan the better choice. Your customer will appreciate the great customer service in creating a tailored financing option that makes their project possible! And there is always the prospect of losing customers to lenders who present the SBA 504 option.
It's EASY! We want to dispel any lingering misconception that an SBA loan is slow and more work than conventional financing. In fact, the SBA has been streamlining the loan application, approval and closing processes with great success. There is no excess paperwork, approvals are fast with no inconvenience for the borrower. CDCs do much of the work for both you and the borrower.
Big Benefits For You As The Bank
- Mitigation of credit risk. Banks have first lien position and typically a 50% loan-to-value ratio, minimizing collateral risk. The SBA can realize on its collateral only if the bank is paid in full.
- Management of overall lending limits and industry exposure. With 504, smaller banks can entertain larger projects. Even larger banks can limit their exposure to certain industries and/or to a particular borrower. The reduction of CRE loan concentration on your balance sheet reduces regulatory concerns.
- Can assist more customers. Leverages lending capacity across more borrowers and diversifies default risk and reduces loss in the event of default.
- Gain new customers. SBA 504 loans are designed to finance growth companies, and an entrepreneur who is investing in a permanent facility is often entering into his largest business-related loan. An SBA 504 loan often becomes the basis of an entire banking relationship.
- Active secondary market. There is an active secondary market for 504 first mortgage loans, so banks can reduce their exposure to zero and enhance their non-interest income while retaining the customer’s primary banking relationship.
- Strengthening of core earnings. Pricing of the bank’s loan is at its discretion. 90% financing also means that more of the customer’s funds remain on deposit, which enhances earnings. The bank is able to earn fees and interest on the interim loan, and generate fee income from sale premiums and loan fees if it chooses to sell the first mortgage loan in the secondary market.
- CRA Credit. Banks that participate in SBA 504 loans are eligible for Community Reinvestment Act (CRA) credit on certain projects.