If you’re considering getting a commercial loan to purchase or renovate a building for your company, the U.S. Small BusinessAdministration’s (SBA) 504 Loan Program could be a viable option.
“We call it the ‘Smart Choice Commercial Loan’. It’s also known as the 504 loan,” says Chris Hurn, President of Mercantile Commercial Capital, LLC.
On the SBA website, the 504 loan is touted as providing small businesses with long-term, fixed-rate financing and interest rates that are favorable to bond market rates.
To be considered a small business, SBA requires that the business have a net worth under 7 million and the net profits, after taxes, less than 2.5 million. The loan, among other things, can be used to purchase commercial real estate—renovations, land and improvements including: grading, fixing streets, utilities, and parking lots. It can also be used to construct new facilities, modernize, renovate, or convert existing ones.
Hurn calls this type of loan the industry’s “best-kept secret”. “It is 90 percent loan-to-cost. That’s very different from what most banks will do in the commercial world. Most banks will do anywhere from 70 to 80 percent loan-to-value,” says Hurn.
Hurn says the difference between loan-to-cost and loan-to-value is significant. He says, “the purchase price or the appraised value (whichever is less) when you’re financing loan-to-value is used. However, when loan-to-cost is used, “We actually take a look at the total project cost and whatever that number is, we finance 90 percent of it, in most cases,” explains Hurn.
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