SBA 504 loans are attractive to small businesses due to their lower interest rates, comfortable terms, and low down payment requirements. But like conventional loans, SBA 504 loans take time. It can take up to 90 days for a loan to be approved, underwritten, and funded. What if a small business needs cash faster? Hard money can help.
Hard money lenders are known for their speed. They can approve and fund loans in a matter of days rather than months. This is ideal for a small business owner that needs immediate funding but wants to take advantage of what SBA 504 loans offer.
The Basics of SBA 504
The SBA 504 program is administered by the Small Business Association in concert with third-party lenders and other partners. The federal agency oversees the program rather than providing direct financing. Financing is provided as follows:
- Third-party lender – 50%
- Certified development company (CDC) – 40%
- Borrower – 10%
The borrower’s contribution constitutes his down payment. As for the CDC, it is a nonprofit organization established to promote economic development in a local community. It is certified by the SBA to partner with a third-party lender to provide SBA 504 funding.
Why The Loans Are Good for Small Businesses
As previously mentioned, lower interest rates and longer repayment terms make SBA 504 loans ideal for small businesses. Interest rates are typically tied to the federal government’s 10-year Treasury note. As for repayment terms, 20 years is not unusual.
Here are some other reasons SBA 504 loans are good for small businesses:
- They require lower down payments.
- They work well for long-term property acquisitions.
- They are applicable to fixed assets, like owner-occupied commercial property.
Despite the many benefits that come with SBA 504 loans, borrowers still need to face a complicated and time-consuming approval and underwriting process. If time is of the essence, a borrower may not be able to hold out for up to 90 days. That is where hard money comes in.
Hard Money as a Bridge Loan
Actium Partners, a Utah hard money lender specializing in commercial real estate, explains that their loans are often utilized as bridge loans between acquisition and traditional financing. So imagine a business approaching Actium with a plan to invest in a piece of commercial real estate.
The owner is reasonably assured that his SBA 504 loan will come through as planned. In the meantime, the seller is ready to close. He has given the business owner just two weeks to secure funding. There is no way the SBA loan will be funded in time. Actium Partners can step in to save the day.
After receiving the loan application, Actium would take a look at the property and its value. An appraisal would be done if necessary. As long as the value of the property is enough to cover the amount being borrowed, approval should be given.
Actium can complete the documents and fund the loan in the matter of days. Now the business owner can complete the transaction. A few months down the road, when his SBA 504 loan comes through, he repays Actium Partners.
A Pretty Common Scenario
It turns out that using hard money as a bridge loan between property acquisition and traditional financing is fairly common. A business owner applying for an SBA 504 loan, but pressed for time, could approach a hard money lender for access to fast cash while he waits on the bank. Everybody wins. The hard money lender makes a quick profit, the business owner completes his acquisition, and the SBA fulfills its mission.
