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Exposing the Myths - 4 Common Misconceptions for SBA 504 Loan [Part III]
Exposing the Myths – 4 Common Misconceptions for SBA 504 Loan [Part III]
Common Misconceptions for SBA 504 Loan [Part III]

Exposing the Myths – 4 Common Misconceptions for SBA 504 Loan [Part III]

Exposing the Myths – 4 Common Misconceptions for SBA 504 Loan [Part III]

It’s time to wrap up our Mythbusters series, where we expose the reality behind some of the most widespread myths about the SBA 504 loan program. In this third and final part, we will address four more common misconceptions for the SBA loan that may be holding you back from taking advantage of this powerful financing option for your small business.

Myth-Busters Series Part Two Recap

Before we tackle the final set of myths in this series, let’s briefly revisit the misconceptions we addressed in Part 2:

  • Myth 4: Onerous Prepayment Penalty – Contrary to belief, SBA CDC 504 loans have manageable prepayment penalties, gradually diminishing and disappearing over the loan term.
  • Myth 5: Semi-Annual Loan Payments Only – The SBA 504 loan payoff schedule is more flexible than rumored, allowing payments beyond biannual dates when appropriately navigated.
  • Myth 6: SBA 504 vs. Bank Loans – Far from being rivals, SBA 504 loans actually work symbiotically with bank loans, sharing risk and often improving loan conditions for borrowers.

[Part II] Exposing the Myths – 3 Common Misconceptions for the SBA 504 Loan

Myth #7: The Loan Comes From the Government/SBA

One of the most persistent myths about the SBA 504 loan is that it is a direct loan from the government or the SBA. This is not true. The SBA 504 loan is a partnership between three entities: a bank, a certified development company (CDC), and the borrower. The bank provides 50% of the project cost, the CDC offers 40% through a debenture guaranteed by the SBA, and the borrower contributes 10% as a down payment. 

Myth #8: The Government/SBA Services the Loan

Another myth is that the government or the SBA is responsible for servicing the loan, meaning collecting payments, providing statements, and handling any issues that may arise. This is also not true. The bank and the CDC are the ones who service the loan, each for their respective portions. 

The bank services the first lien loan (50%), and the CDC services the second (40%). The borrower makes two separate payments, one to the bank and one to the CDC, each month. The SBA does not service the 504 loan but instead monitors the performance of the CDCs and ensures compliance with the program regulations.

Myth #9: SBA 504 Loans Cannot Be Used to Refinance

Some people may mistakenly think that the SBA 504 loan can only be used for new projects, such as purchasing land, building, sba equipment loan, or machinery. The SBA 504 loan can also be used to refinance existing debt as long as the debt was incurred for eligible fixed assets and meets specific criteria. 

For example, the debt must have been incurred at least two years and six months before the application date, the borrower must have been current on all payments for the last 12 months, and the refinancing must provide a substantial benefit to the borrower, such as lowering the interest rate, extending the maturity, or improving the cash flow. Refinancing with the SBA 504 loan can help small businesses reduce their monthly payments, free up working capital, and improve their financial position.

Myth #10: The Bank Partner Needs to Be an SBA expert

The last myth we will bust is that the bank partner for the SBA CDC 504 loan needs to be an SBA expert or have extensive experience with the program. The bank partner does not need to be an SBA expert because the CDC handles most of the SBA-related aspects of the loan, such as packaging, closing, and servicing. The CDC, like 504 Capital Corporation, acts as a liaison between the bank, borrower, and SBA, providing guidance and support throughout the process. 

The bank partner only needs to underwrite and service the first lien loan (50%), similar to any conventional commercial loan. The bank partner can benefit from the SBA 504 loan by reducing their risk exposure, increasing their lending capacity, and expanding their customer base.

Boost Your Business with 504 Capital Corporation

We hope that this MythBusters series has helped you better understand the SBA 504 loan program and cleared up some of the rumors that may have prevented you from considering it for your CDC small business finance needs. The SBA CDC 504 loan is an excellent option for small businesses that require long-term, fixed-rate financing for major fixed assets, such as sba commercial real estate loan or heavy equipment loans.

504 Capital Corporation is a nonprofit organization founded in 1983 under the name Tidewater Business Financing Corporation (TBFC). We have over 40 years of experience providing SBA 504 loans to small businesses in Virginia, Chesapeake, D.C., Maryland, and North Carolina, loaning more than $250 million to small business owners. Certified by the U.S. Small Business Administration (SBA) to provide permanent financing through the SBA 504 Loan program, our loans help businesses grow and succeed. Contact our experts to get started.

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