Are rising interest rates making you nervous about your upcoming business expansion or acquisition? You may be in luck, and able to fix the interest rate on up to 40% of your project for as long as 25 years. These long-term, fixed interest rates are available through the growing Small Business Administration (SBA) 504 program. The 504 program’s primary focus is owner occupied projects from $350,000 to $20 Million. The SBA suggests 2018 is the ideal time to apply for SBA loans.
According to Jason Monnett, Senior Vice President for Wisconsin Business Development (WBD), the SBA is anticipating increased usage in 504 funding in the future for a few reasons:
- The aging of baby boomers will create a large transfer of wealth to the next generation of business owners. Whether the buyers are existing employees or outside companies looking to acquire or merge the company into their existing businesses, a lower down payment with long-term financing will provide a more favorable financing structure for the buyers and will help facilitate the sale.
- The strong U.S. economy has created optimism among retailers and consumers, resulting in small business owners investing in growth opportunities.
- In 2017 there were record highs in lending to companies that are more than 50% female-owned, and companies owned by retired military members.
Hedge Interest Rate Risk
The SBA offers several different types of loans, but the 504 loan program offers long-term, fixed rates by using the bond market—which is typically reserved for very large borrowers. However, under the 504 program, borrowers looking to expand or acquire fixed assets such as real estate and equipment, can obtain long-term fixed rates for up to 25 years. The 25-year term was just introduced on April 2, 2018. Equipment-only projects can typically receive up to 10-year fixed terms.
The borrower can put as little as 10% cash down with the 504 program, making a fixed-rate commitment on 40% (30-35% on special purpose projects or start-up businesses) of the request. The remaining 50% of the project is financed with a bank, typically at the same amortization as the 504 program. The SBA portion is funded through the issuance of bonds that are backed by the government to investors. The current 20-year debenture rate, with all fees included, is currently running at about 4.9%– just above the current Prime Rate of 4.75%. This is a great rate considering we have entered into a rising rate environment beginning in late 2016. Additional rate hikes by the Federal Reserve are expected in the near future.
The ability for a borrower to put 10% down instead of the typical 20% or more that a bank may require allows the company to use the remaining cash for other business needs. The longer amortization also helps the company’s cash flow during the life of the loan.
Ease of Doing Business
There is a misconception that the SBA makes loans; The SBA does not lend money directly to business owners. SBA loans are available to borrowers through SBA partner financial institutions (typically banks).The loan first needs to be approved by the bank submitting the loan to the local certified development company (CDC). Once the SBA has received a completed application, the approval is usually completed within 30 days.
In its 30+ year history, the 504 has funded $75 billion for projects totaling $187 billion, reaching 145,000 small businesses. It is estimated that 504 projects over the life of the loan program have created or retained nearly $2.2 million jobs in the U.S. since 1991, when the relevant data became publicly available. Though SBA loans require a bit of extra paperwork, rates are usually attractive and long-term. Business owners who don’t need to secure funding quickly should consider SBA loans in 2018.