Quite often, when a company needs a business loan, their first step is to contact the lender where they do all their business banking. They inquire about a conventional or traditional commercial loan. As the name suggests, this is the most common type of commercial loan. The company feels comfortable using a familiar lender and receiving a familiar loan. However, quite as often, this is not the right loan. There is a better way: The SBA 504 loan program.
- Lower Down Payments. Conventional loans can require 20 to 35 percent down. This larger down payment helps reduce the risks for the lender. With a 504 loan, the down payment is as low as 10 percent. This can amount to a large cash savings. Why tie up your available cash in a down payment when you don't have to?
- Longer Terms and Better Interest. Conventional loan rates are typically only fixed for a certain length of time, 3 – 10 years. After that, the rate is reset, and could become variable or even need to be refinanced.
With a 504 loan, Community Business Finance finances 40% of the project cost with a second lien loan. This loan rate is usually below market and fixed for the entire term of the amortization, usually 20 years. A conventional lender finances 50% of the project cost with a first lien loan. The two loans have one monthly payment and the blended interest rate is still below straight conventional loan rates. The longer loan terms mean lower monthly payments, as well.
- No Surprises. A balloon payment means the principal balance is due on a certain date. This means the borrower has to pay the remaining loan balance outright or refinance the remainder. Unlike conventional loans, a 504 loan has no balloon payments.
Call provisions are similar to balloon payments. With a conventional loan, you may be required to maintain a specific debt service coverage ratio. This is a way for lenders to lower their risk. If a borrower doesn't meet this provision, the lender can call in your loan. This means you must pay off the balance or refinance it, just like a balloon payment. The 504 loan has no covenants or call provisions.
- No Out-of-Pocket Extras. With any loan there are closing costs. These include loan origination fees, title insurance, survey, appraisal fees, etc. These can really add up. In a conventional loan, the borrower usually pays these costs up front. With a 504 loan, these costs are rolled into the loan, saving the borrower another outlay of cash.
- Streamlined Process Is Faster Than Ever. There is a prevailing myth that an SBA loan takes too long to prepare and process. This is simply not true. A 504 loan takes no longer to process than a conventional loan. As experts in the 504 loan program, Community Business Finance loan officers are efficient in gathering the right information. They use electronic documentation for processing and submission, increasing productivity and allowing the loan process to move faster.
Why settle for common when you can reap the benefits of a better loan? An SBA 504 loan will save you money, allow you to keep more of your cash reserves, and better serve your financial future. Contact Community Business Finance to learn more about why a 504 loan should be your first choice in business financing.