Small Business Loan Program Creates Opportunity for Commercial Real Estate Investment

During the times of general uncertainty due to the COVID-19 pandemic, there has been an immediate economic impact. American small businesses have been hit as hard as any other player in our economy. However, recovery will come and opportunity will arise. Let’s take a look at a United States Small Business Administration (SBA) loan program that could be instrumental in getting American small businesses back on track in the second half of 2020 and beyond.

The SBA 504 Loan Program

The 504 Loan Program provides small businesses an alternative to conventional financing, offering business owners the opportunity to purchase or renovate commercial real estate with a more favorable lending scenario. To qualify as a “small business” under the program, the business must have a net worth of $15 million or less, and net profits of $5 million or less after taxes for the two years prior to applying for the loan.

The primary benefits under this loan program are its long-term nature, the low down payment requirement, and the fixed-rate of the loan. Under the 504 Program, businesses will see a loan term of 10, 20, or 25 years depending on the specifics of the project. The longer term allows the business to significantly lower their monthly payments from a traditional loan and keep more cash on hand for operations and other expenses.

In a normal lending scenario, the lender will often require the small business to contribute a down payment of 20% or more to obtain the loan. The 504 Program typically requires only 10% down from the business. The policy objective here is to allow the business owner to have more working capital as they undertake the new business endeavor.

The other 90% of the financing comes from a combination of a traditional lender participating in the 504 Loan Program and a Certified Development Company (CDC). The participating lender will cover 50% of the total cost of the project, with the CDC contributing the final 40%. The CDC’s portion of the financing will come with a fixed rate, allowing the business owner to know exactly what to expect and plan accordingly for the future.  


The Project

In light of the financial circumstances created by the COVID-19 pandemic, many in the real estate industry expect commercial properties to become available for a bargain. Under the 504 Loan Program, small business owners can cover a wide range of their costs for their project. Covered costs include the building and land purchase, but will also cover improvements and renovation, certain equipment and machinery, and even “soft costs,” which are transaction costs like legal fees, appraisals, or an environmental impact study.

Although there are other concerns due to the uncertainty accompanying the pandemic, a wave of defaults on existing obligations could create opportunity with commercial properties becoming available. Small business owners who put together a project with a strong long-term vision can benefit tremendously from the SBA 504 Loan Program.

Certainly, what comes next is an open question. Ask ten people what they think the future holds and you will likely get as many unique answers. However, entrepreneurs and business owners who look for opportunity in challenging times are more likely to enjoy the spoils once everything is back on track. Further government stimulus for small businesses may be shortly down the road, and opportunity will come knocking.  

Are you interested in learning more about how Goosmann Law Firm can help you and your business? Reach out to our offices in Sioux City, Sioux Falls, or Omaha to connect with us so that we can help grow your ideas and get to work for you.


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