Unlocking the Benefits:

How the 504 Loan Program Helps Small Business Owners and Lenders Alike.

Small business owners frequently have difficulty trying to obtain funding for their operations. They can have a hard time finding lenders who will offer them affordable loans with fair payback terms. Fortunately, there is a solution that can assist small business owners in obtaining the money they need while also benefiting lenders. The 504 loan program can be the perfect solution.

The 504 loan program is a type of financing created especially to assist small firms buy fixed assets including property, machinery, and equipment. The Small Business Administration (SBA) oversees this program, which entails two loans: one from a private lender and the other from an SBA-backed Certified Development Corporation (CDC).

Small business owners can benefit from the 504 loan program, but lenders can also benefit from it. Lenders who take part in the 504 loan program, in particular, can reduce their risks and expand their lending capacity. Let’s examine the program’s operation and the advantages for lenders in more detail.

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The 504 Loan Program’s Foundations

A first mortgage loan from a private lender and a second loan from a CDC that is backed by the SBA are the two loans that make up the 504 loan program. The CDC may contribute up to 40% of the overall project cost, while the private lender normally contributes 50%. The final 10% of the project’s cost is to be covered by the borrower.

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Small business owners can gain from the 504 loan program in a number of ways, including:

  • Extended payback terms: For real estate, machinery and equipment, the program offers repayment terms of up to 25 years and 10 years, respectively. By spreading their payments out over a longer period, borrowers are able to better manage their cash flow and lower their monthly payments.
  • Minimal down payments: The minimum down payment requested from borrowers is 10% of the total project cost. This enables small business owners to save money and use it for other operational costs.
  • Competitive interest rates: Compared to conventional loans, 504 loans often have lower interest rates. Through the course of the loan, this may enable borrowers to save money.
  • Fixed interest rates: Because 504 loan interest rates are set for the duration of the loan, borrowers benefit from stability and predictability.
  • No balloon payments: Borrowers are not required to make balloon payments under the scheme, which relieves some of the load on small business owners.

How the 504 Loan Program Benefits Lenders

Small business owners can benefit from the 504 loan program, but lenders can also benefit from it. Participating lenders, in particular, can reduce their risks and expand their lending capacity.

  • Risk Mitigation: By splitting the loan with a CDC, lenders who take part in the 504 loan program are able to reduce their risks. The lender is solely liable for the remaining 50% of the project cost because the CDC contributes up to 40% of the overall cost. This lowers the risk for the lender and enhances the possibility that they will be paid back.
  • Expanding Lending Capacity: Lenders who take part in the 504 loan program can expand their lending capabilities. This is so lenders can lend more money to small business owners since the program enables them to finance up to 50% of the overall project costs.
  • Participating lenders in the 504 loan program have the opportunity to earn free money. This is due to the CDC’s fees, which are typically 1% of the project’s overall cost. The borrower is responsible for this cost, which is shared between the CDC and the private lender.
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