Once a small business has established itself in the marketplace and stabilized financially, the owner may consider expanding the enterprise to continue growing and building long-term equity. Business expansion can develop in various ways. The two most common situations involve a company either adding onto its existing building (i.e., constructing a new wing or building on-site) or establishing an additional, stand-alone location. The U.S. Small Business Administration developed a product called the SBA 504, which is flexible enough for various expansion scenarios.

What is the most common reason a small business is unable to expand?

In most cases, the company lacks the capital and financing needed to purchase a new building or equipment because it doesn’t have the equity required by the bank for the down payment, or the business's cash flow is not strong enough to support the proposed debt service. This means the request is either denied, or the business must settle for a property that is not the most optimal for their expansion plans.

How can an SBA 504 loan solve this capital and financing dilemma?

The SBA 504 loan helps a business owner purchase the desired real estate and equipment it needs to take the next step by requiring as little as 10% down, instead of the 20-25% typically required for conventional loans.The SBA 504 will also amortize the loan over a period of up to 25 years, compared to the 15 years commonly required by traditional lenders.

How can I get the SBA to approve a 504 loan with only 10% equity for a new location?

The SBA will consider a business to be in expansion mode and eligible for a 10% loan when the existing business starts or acquires a new business location that is classified in the same 6-digit NAICS industry code, has identical ownership, and is located in the same geographic area as the acquiring entity. If that is the case, the existing and new entities will be co-borrowers, in addition to the real estate holding company, if one is formed.

What if I need working capital to add staff, purchase inventory, and market my new and improved business?

The SBA allows for a companion working capital loan, known as the SBA 7(a). The loan provides operating capital to spur growth, and the payout can be as long as 10 years to minimize the impact of the debt on monthly cash flow.

Why would my bank want to offer an SBA 504 loan?

For the bank, it means they can offer more attractive loan terms to the business owner while taking less risk. In addition to the 10% down and 25-year amortization, the SBA 504 also provides a below-market fixed interest rate. The bank is more likely to approve a riskier expansion situation that has repayment dependent on financial projections, as it will hold a 1st lien position of 50% with virtually no collateral risk.