Welcome back to our “Myth-busters” series, where we debunk common myths surrounding the SBA 504 loan so that small businesses can make informed decisions about their financing options. Brought to you by 504 Capital, a Certified Development Company (CDC) serving Chesapeake, Virginia, North Carolina, and Maryland, our mission is to demystify the SBA CDC 504 loan process and help you leverage this powerful financial tool to fuel your business growth.
Myth-busters Series Part One Recap
Before we dive into the new myths for today, let’s quickly recap what we covered in Part 1 of our series:
- Myth 1: The Process is too long: We explained that the loan process is as little as 60 to 90 days and can be expedited with proper documentation and preparation.
- Myth 2: SBA 504 loans are only for small and/or new companies: We clarified that these loans are available to established businesses of various sizes, not just small or new ones.
- Myth 3: Borrowers must occupy 100% of the space: We debunked this by highlighting that the SBA’s occupancy requirement is actually 51% for existing buildings and 60% for new constructions.
Myth 4: High Prepayment Penalty
One of the common misconceptions about the SBA 504 loan is the high prepayment penalty. But the truth is, the prepayment penalty isn’t as high as it’s made out to be.
Here’s a simple explanation: the SBA 504 loan operates on a dual-mortgage model, which means you have two separate loans.
- First Mortgage: Typically, it has a five-year prepayment penalty. You must pay a penalty if you pay off this part of the loan in less than five years.
- Second Mortgage: This one has a penalty that lasts for ten years, decreasing each year over the first ten years. After that, there is no penalty.
One important point to remember is that the prepayment penalties only apply to the SBA portion of the loan. Depending on the lender, the conventional loan portion may have different prepayment terms. If you want to refinance your conventional loan, you can do so without affecting your SBA 504 loan if you request a subordination from the SBA. This flexibility is one of the advantages that makes SBA 504 loans an attractive option for many businesses.
Myth 5: 504 Loans Can Only Be Paid Twice a Year
The truth is that because 504 loans are tied to debentures, the payoff amount will include the remaining principal, interest, and fees due through the next debenture date. A debenture is a bond issued by the CDC and sold to investors to raise funds for the 504 loan program. The debenture date is when the CDC pays the interest and principal to the investors. Therefore, if you want to pay off your 504 loan early, you must pay the amount due by the next debenture date, which could be several months away.
Myth 6: SBA 504 Loans Compete with Bank Loans
Some people believe that SBA 504 loans compete with conventional bank loans, but this is not the case. The SBA 504 loan actually complements conventional bank loans. The loan structure requires a 50% contribution from a private lender like a bank and a 10% down payment from the borrower. The SBA funds the remaining 40% through a Certified Development Company (CDC).
This structure lessens the risk for the bank and the borrower and enables the bank to offer more favorable terms and rates to the borrower. Therefore, the SBA 504 loan does not compete with but supports typical bank loans.
Learn More SBA 504 Facts with 504 Capital
If you’re a small business owner, don’t let myths and misconceptions hold you back from capitalizing on the SBA 504 loan. As we’ve revealed, these loans are not only affordable and accessible but also complement conventional loans— making them a powerful tool to fuel your business growth.
Ready to reap the benefits of SBA 504 loans with 504 Capital? Start your application today. We’re here to guide you every step of the way, debunking myths with CDC small business finance tips for your business success.