504 Loan Structures
The SBA 504 often confuses a lot of confusion because it’s not structured like your typical commercial bank loan. However, we think that once you see how the math breaks down, the SBA 504 makes good sense if you want to maximize your cash flow now, while also priming your business for growth:
Example A: Total Project Cost of $1 million
Real estate acquisition: $800,000
Renovations: $100,000
Machinery: $50,000
Soft costs and closing costs: $50,000
Example B: Total Project Cost $1 million
Land: $250,000
Construction: $600,000
Soft Costs: $125,000
Closing Costs: $25,000
Example Loan Structure: Total Project Cost: $1 million
1st Mortgage: 50% – $500,000
2nd Mortgage: 40% – $400,000
Equity: $100,000
Here’s how the costs break down:
50% of the Total Project Cost – Equates to a Conventional Loan at Market Rates
- Up to 25-year amortization
- Predictable payments – no balloons, calls, or covenants
- You can have either a fixed or variable interest rate
- The loan can be assumed
40% of the Total Project Cost – Below Market, Fixed Rate with a Guarantee from the SBA
- Amortizes over 20 years
- Predictable payments – you don’t have to deal with balloons, calls, or covenants
- Fixed interest rate for the entire 20 years
- The loan can be assumed
10% of the Total Project Cost – Equity/Down Payment
- Cash
- If land has already been purchased, that equity can be used
- Prepaid soft costs, such as fees for services for the project (architectural and engineering) may also be used for equity
- The loan can be assumed
- *If you have a special property or startup, 15% or 20% equity may be required.
If you want your business to own its own commercial real estate, the SBA 504 makes the most sense out of all the funding options available.
