SBA 504 Loan FAQ
At 504Savvy we want to match you with the best lender for your loan, but we also want to help you understand 504 loans. We know that there’s a lot to learn, and it can all be a bit overwhelming! On this page you can find answers to many of the common questions borrowers have about 504 loans.
For a broad background on 504 loans, you can check out our 504 Loans, 504 Lenders, and 504 Interest Rates pages.
A 504 loan can be used in a variety of ways, with valid uses of proceeds including:
– Real estate purchase
– Construction
– Real estate or building improvements
– Equipment purchase
504 loans cannot be used for real estate investment, either commercial or residential. If a 504 loan is used to purchase real estate, it must be with the primary goal of operating a business on the premises. However, the owner may still rent out up to 49% of the property.
SBA 504 loans can generally be used for any kind of for-profit business. Some common uses of 504 loans include:
– Retail
– Restaurants
– Hotels/Motels/B&Bs
– Gas Stations
– Convenience Stores
– Storage Facilities
Due to the lower risk of 504 loans, lenders are more willing to give them out. This often makes them more attainable, and on better terms, than conventional loans. Additionally, 504 loans are fully amortized and available at terms of up to 25 years, meaning security in the loan and a lower monthly payment.
SBA 504 loans, SBA 7(a) loans, and USDA B&I loans are all good options for small business loans, as they have high attainability and favorable terms. However, 504 loans can be larger than 7(a) loans (which are capped at $5 million), and their availability and eligibility are broader than those of B&I loans (which are offered by fewer lenders and only available in rural areas). As such, for many borrowers and businesses, SBA 504 loans are the best choice.
Cash flow is a term used in the commercial loan industry. In the case of 504 loans, it refers to a business’s net income plus interest, depreciation, amortization, and rent costs. These extra values, which can be found on a business’s tax form, are added back to the business’s income to give a more complete idea of the size of loan the business can pay back.
Generally, a business (depending on the purpose of the loan, either the business being purchased or the business of the person getting the loan) must have at least enough cash flow to pay back the loan, plus a little extra. The most common metric for calculating this is the debt service coverage ratio, found by dividing the annual cash flow by the annual loan payment. The target cash flow ratio of most banks is 1.2.
However, this is not a hard and fast rule, as a cash flow ratio below 1.2 can still work. This is especially true if the loan proceeds are going toward buying a business. A business may be sold to an owner who will be better at running it, raising cash flow, or who will cut costs, raising the cash flow ratio.
Even if the loan is being used for something other than a business purchase, though, a lower cash flow ratio can still work. It all depends on finding the right lender – and luckily, 504Savvy can help.
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