504 Defined: Capital for Small Businesses

Last year, more than $4 billion was invested in small business needing to purchase real estate, buildings and equipment. The source: the U.S. Small Business Administration’s “504” loan program.

The 504 loan program has experienced unprecedented growth in the past several years, enabling businesses throughout Florida and the nation to purchase real estate and equipment at favorable terms and historically low fixed interest rates. To qualify, a company must be a for-profit small business in Florida with an acquisition, expansion, construction or renovation project. A business qualifies as small if it has tangible net worth below $7 million and average after-tax profits below $2.5 million for the previous two years. Most types of companies and projects are eligible.

Last year, the SBA approved more than 8,000 504 loans totaling more than $4 billion, marking a 21% rise in the number of loans and a 26% jump in the amount loaned from a year earlier.

In Florida, similar gains were reported as small business owners take advantage of the long-term low fixed rates that the program offers. Though most projects are eligible, here are a few of the most common scenarios where 504 loans are used to purchase commercial real estate:

Rent replacement. In many cases, the best potential buyer for a building is the tenant that already occupies it. The 504 loan fits this scenario very well as it enables an owner to occupy only 51% of a building and rent out the remainder. This benefit enables a growing company to buy for the future and gain rental income immediately.

Business expansion. For businesses looking to expand by either adding on to an existing building or purchasing a new structure, the 504 is hard to beat. Requiring a smaller equity commitment than most loans (only 10%, which need not be cash), a business owner intent on expansion can move faster, and keep more operating capital in his pocket.

Development financing. The 504 program enables developers to offer financing for prospective buyers. For example, a developer of an industrial park, working with a 504 lender, can gain quick approval for prospective buyers of warehouse or other space. The developer benefits by providing superior terms for the purchase of her inventory, while the buyer gets a low, fixed rate that’s not available from a conventional lender alone.

Other features of the 504 loan include:
• Low down-payment requirements (typically 10 percent) to help preserve working capital.
• Maturities of 10 or 20 years are available.
• Loans are assumable by qualified, acquiring businesses.
• Fees and other up-front costs and expenses may be financed with the loan.
• Assets being financed are typically the only required collateral. Personal guarantees of the principal owners are also required.
• Loans are backed by the SBA, the nation's largest single financial supporter of small businesses.
• The program offers additional benefits for women-, veteran- and minority-owned companies, export-related companies and businesses in rural communities.

The continuing growth of the 504 loan program is no accident. Unlike other SBA loans, the 504 loan program is self-financing and is operated without funding from the U.S. Treasury. SBA Administrator Hector Barreto has repeatedly said that larger real estate transactions should be steered to the 504 program as the best SBA financing solution in most cases.

.