What Lenders Don’t Say – 504 Loans Versus SBA 7(a) Loans:
If you approach a commercial lender about 504 loans, they’ll typically change the discussion to SBA 7(a) loans. There is a good reason they do this: SBA 7(a) loans are in the better interest of the lender.
They’re helpful for small business owners, but not nearly as much so as 504 loans are for commercial real estate and major fixed assets. Learn more about this problem, and how 7(a) loans really benefit the lender:
- The lender assumes virtually no risk – Borrowers put down around 15-20% equity in the loan right away. The lender provides the rest of the funds, but the government offers a guarantee on about 75% of the value of the loan should the borrower default. If you do simple math, the lender stands to lose about 5% of the total loan value – how would you like to take on that level of risk and be almost completely guaranteed you will make a profit, or at least break even?
- Lenders could break the $2 million cap – Typically, 7(a) loans are capped at $2 million. But, with “piggy-back” deals, a lender could finance a first mortgage loan at 65%, and then the remainder could come through another 7(a) loan, again shifting all the risk off itself and onto the government.
- Lucrative secondary market to sell the government-backed portion of the loan – It heated up and grew extensively during the mid-2000s.
SBA 7(a) loans, at least in the case of commercial property, make more sense for small business owners, but for these reasons, lenders will attempt to steer them to 7(a) loans where possible.
Contact NEDCO if you would like to apply for 504 financing today!
