Real estate, construction and equipment loans, with a concierge experience.
What is A
SBA 504 Loan
A SBA 504 loan is a financing product offered by a traditional lender in partnership with a Certified Development Company (or CDC). These SBA backed loans can provide financing up to $13.75M. They feature low down payments (typically 10%), low fixed rates, and long terms (typically 25 years for real estate).
SBA 504 loans are a powerful financing tool offering low down payments and fixed terms. But they aren’t a one size fits all solution. So are they right for you?What can an SBA 504 loan be used for?
What can an SBA 504 loan be used for?
An SBA 504 loan supports the acquisition of major fixed asset such as land, existing commercial real estate, new construction, and commercial equipment.
What businesses qualify for an SBA 504 loan?
Who funds SBA 504 loans?
How can Asterisk Funding help?
Asterisk, on the other hand, is able to provide fixed-rate loans that match bank rates. This means two things: borrowers pay a consistent amount each month, in essence, recession-proofing their payment responsibility. Second, small businesses remain more competitive than peers that only qualify for high-interest-rate fixed loans or variable-rate loans. In fact, Asterisk helps small businesses to secure rates that are typically reserved only for larger, more established companies.
Small businesses receiving a fixed rate loan through Asterisk Funding can then afford the same technologies and real estate as their larger competitors. Isn’t that what competition is all about?
Meet the 504 Players
Who are the players in a 504 loan?
Funds for a project come from three places. 50% is typically provided by a traditional lender, such as a bank. 40% is usually provided through a nonprofit designated as a Certified Development Company (CDC). And the borrower most often contributes 10% of the project’s cost as a down payment.
The SBA’s doesn’t directly provide the financing. Instead, it guarantees a portion the loaned funds, as well as facilitating the underwriting and the resale of each note to investors.
Understanding the 504 Partnership
Let’s take a look how these loans become a win-win-win-win for agencies, investors, businesses and communities and why Asterisk has become a premium broker of SBA 504 loans.
504s Benefit All Players
What is it about the structure of SBA 504 loans that makes them a win-win for everyone involved? Let’s dig into the goals and outcomes for each of the players.
The Business / The Borrower
The borrowers also receive a much longer repayment timeline on the loan – up to 25 years. Most commercial loans offered by a bank or private lender are 10 years or less. They might have a 20-year amortization, but that means the business owner either needs to pay off a large lump sum at the end of 10 years or refinance the property. But SBA 504 loans offer much longer terms.
In addition, with the majority of 504’s, the business owner puts down only 10%, rather than 20% or more. With more leverage, the business can often afford to buy larger assets. In sum, SBA 504 loans benefit businesses because they don’t have to spend time negotiating a new deal on a property they have already purchased, they pay out less at the beginning of the loan, and they have lower monthly payments due to the length of the payment term and the reasonable interest rate.
The Community
Growing businesses also make purchases from vendors, suppliers, and contractors throughout the region. These purchases fund more local businesses, families, restaurants, and so on in the same manner. Money that comes into a community through jobs created or retained through economic development circulates around and around through that community, touching other people’s lives.
The tax base is also increased through the growth of local companies. As a start, the companies themselves pay taxes. In addition, the newly created jobs translate into new income for local families, which is also taxed. Growing incomes also lead to more purchases throughout the local community, which means a larger amount of sales tax is collected.
The increased tax base then funds more services supporting the community. From more police, to better schools and libraries, to repaved roads, this cycle of economic development impacts life for all community members. The entire community wins with a 504 loan.
The CDC
CDC’s are non-profit entities with a mission to support the growth and economic stability of a specific region. A key part of achieving this mission is stimulating the expansion of local businesses. As companies grow, they create more local jobs, re-invest cash into the region through local contractors and suppliers, and provide a larger tax base that in turn supports improved services for local communities.
But how do CDC’s help local companies to grow? One clear path would be investing in these local businesses and supporting them with financing. But most CDC’s (which are often smaller nonprofits) don’t have hundreds of millions of dollars sitting around in their bank account to invest. So this is where the SBA steps in.
The SBA guarantees 100% of the portion of the loan provided through the CDC. If the borrower defaults on the payment, the full credit of the United States government will be used to cover the debt. As a result, investors see 504 debentures as extremely secure investments. Either the borrower or the federal government will pay the debt off in full. Either way, the owner of the note will make a steady, safe return on their investment. As a result, 504 loans become low risk investments that can easily be packaged and sold to private investors.
The SBA facilitates this sale on a national level. In fact, the CDC portion of the loan isn’t funded until it has been purchased by private investors. This means that the CDC achieves its mission of supporting regional development by financing local businesses, but it doesn’t use its own cash for the loans. Instead, it simply funnels money from investors around the country directly into the local community. That is a huge win for the CDC.
The SBA
The SBA is a federal agency tasked with the mission to aid, counsel, assist and protect the interests of small business concerns; preserve free competitive enterprise; and maintain and strengthen the overall economy of our nation. The 504 Loan Program achieves this mission by promoting private sector investment in fixed assets, which in turn increases productivity, creates new jobs, generates additional tax revenue, and strengthens the economy as a whole.
The 504 program offers similar benefits to the SBA as it does for CDC’s. The SBA does not need to fund the loans itself. Private investors provide 100% of the money being loaned. The SBA is leveraging private investors in order to promote economic growth on a national scale.
But what about the costs? Who pays when a borrower defaults on a loan?
The SBA charges a Guarantee Fee to borrowers. This fee is typically 0.5% of the amount funded through the CDC. This fee is minimal, but it is the cornerstone of the SBA program. Through it, the 504 program has remained self-funded without the need for tax payer dollars to support it!
The Traditional Lender
But the 504 program changes the risk profile for the lender. They provide only 50% of the financing, yet they are the first lienholder on the asset. This means that in case of default, the lender is highly protected. As a result, the bank is willing to lend to businesses it would otherwise decline.
As an example, consider a business applying for financing in order to purchase a $10M property. Suppose this applicant has a credit score of 680 and their monthly profit is only 25% more than the monthly payments would be on the loan. (That’s a DSCR of 1.25.) Most banks would be very hesitant to extend credit to this company. Their credit history reflects prior failure to repay debts, plus a few small setbacks in the business could easily leave them unable to make their monthly loan payment.
The 504 program changes the bank’s risk calculous drastically. The bank would only need to lend $5M, but they would still be the primary lienholder. This means that if the client doesn’t make payments on time, the bank can foreclose on the property which is worth $10M. Best case scenario, the client pays their debt on time and the bank profits. Worst case scenario, the bank spends $5M to acquire a $10M property. It then turns around and resells the property, again making a handsome profit. Thus the 504 program is a win for banks, or traditional lenders. It allows them to safely serve more clients and boost their profits.
Asterisk Funding
What is our roll?
We start with a detailed initial assessment conversation, walking the borrower through a pre-underwriting analysis to make certain they are a great fit for a 504 and have a high chance of approval. If they won’t be able to qualify for a 504, we help the business to explore other financing options. For all companies that are strong candidates, we move to the next step: meticulous packaging.
Once we know that a business is a great fit for an SBA 504 loan, our team begins the packaging process. We serve as the borrower’s advocate. This means that we will assemble, stress test, reinforce, and polish the entire application before it is ever submitted to underwriting. Our name – Asterisk Funding – reflects the significance of this meticulous packaging process in how we serve clients. If a lender is ever doubting a particular piece of information or claim in the application, they can simply look for the asterisk. The supporting documentation will always be there.
This meticulous pre-work means that when the application is finally submitted to underwriting the scale has been tipped strongly in our clients’ favor. The application is compelling, the documentation is complete, and each projection is fully substantiated. This approach is how we achieve faster closings, lower rates, and a higher rate of approvals for our clients.
2 Years of Financials
$100k+ Annual Revenue
To add owner operated properties to your balance sheet you need a DSCR of 1.25 % or greater. We recommend $300,000 gross revenue as a floor for real estate acquisition. Businesses seeking equipment can start as low as $100,000.
675+ FICO Score
SBA loans support businesses that cannot get easy approval through traditional lenders. SBA support means that even when your credit has taken a hit, financing can still be secured. For smooth approval, we recommend a FICO of 675+.
We make the journey from application to funding quick and easy.
1: Apply
It all starts with a short online application. Within 5 minutes you'll provide our team with all the information needed to unlock your best financing options.
2: Consultation
Our team will reach out and walk you through available options. Then we'll hold your hand through each step in the underwriting process.
3: Funding
Once underwriting is completed, the loan closes. You receive the funds deposited directly into your company's bank account.
This flexible approach gets you the best results and the lowest cost of capital. To execute in this way, we first need to understand your business, your big opportunities, and the challeges you face. From there, we can leverage our decade of commercial funding experience and our network of hundreds of lenders to source the best options for you. And it all starts with a conversation.
Our team is here to help you access the capital you need to grow.