For businesses seeking property or equipment loans, finding the lowest interest rate can seem like the best move. However, bear in mind that the interest rate is only one aspect of your loan contract, and it doesn't mean you will pay the least amount of money over the life of the loan. Therefore, the loan with the lowest interest rate might not actually be the best loan for your business. In fact, Community Business Finance's 504 Loan Program has many advantages over a conventional loan.
Interest Rates and Loan Length
First, your interest rate does matter. 504 Loan rates are usually below market and fixed for the entire term of the amortization, usually 20 years. This means you lock in your interest rate for the entire term of the loan. The longer repayment schedule means lower monthly payments.
Conventional loan rates are typically only fixed for a certain length of time, usually 3-10 years. After that, the rate is reset, and could become variable or even need to be refinanced. As interest rates are climbing, you could be forced to refinance your loan at a much higher rate in the future, or be at the mercy of a variable interest rate.
There is a significant difference regarding down payments. Conventional loans can require 20 to 35% down. This larger down payment helps reduce the risks for the lender. With a 504 Loan, the down payment is as low as 10%. This can amount to large cash savings and mean the difference between being able to afford a loan or not, especially if multiple loans are needed.
Balloon Payments and Call Provisions
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. 504 Loans have no balloon payments. Conversely, conventional loans on a 20-year mortgage typically only have a fixed rate for five years or less, requiring refinancing, usually at a higher rate.
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.
Closing Costs and Fees
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, which saves the borrower another outlay of cash, and 504 Loan fees are the lowest on the market, even compared to SBA 7(a) Loans.
As you can see, interest rates are important but not the only concern when considering a business loan. The advantages of a 504 Loan obviously outweigh a conventional loan, even with a lower interest rate. The shorter loan lengths, balloon payments, and call provisions of conventional loans create a much higher chance of refinancing the loan in the future. With interest rates on an upswing, you are almost guaranteed to be paying a higher interest rate in the future.
To get started with a 504 Loan, fill out a short online form and a loan expert will contact you to discuss your needs.
You can also contact our offices directly:
In Texas, call Bill Ebersole at 713-457-1650, ext. 201, or email him at firstname.lastname@example.org.
In Louisiana, call Jeanne Bergeron at 1-800-462-1017, ext. 203, or email her at email@example.com.