SBA 504 Loans

The SBA 504 loan program is the best way to get a fixed rate SBA loan.  The SBA 7a loan program is a floating rate commercial loan, tied to prime with no floor or ceiling.  Yikes.

SBA 504 loans are a little complicated to understand, but they are super-easy to get.  The program consists of a conventional first mortgage, with an SBA-guaranteed second mortgage riding piggyback on top.  The conventional first mortgage will typically come from a bank.  It will have a fixed rate for the first five to ten years.  If the loan is only fixed for the first five years, it will typically readjust once at the end of five years and then be fixed for the remaining five years.  The conventional first mortgage loan will usually be amortized over 25 years, and it will balloon after ten years.

The piggyback second mortgage will come from a local Community Development Corporation (CDC), and it will be guaranteed by the Small Business Administration.  By the way, the word “piggyback” is redundant.  A second mortgage is always subordinate to a first mortgage, but my point here is that the first mortgage and the second mortgage are recorded on the same day, just minutes apart.  A Community Development Corporation (CDC) is a non-profit organization consisting of a small group of people trying to bring businesses and jobs into a city.  It frequently includes the Mayor, the City Treasurer, and the head of the local Chamber of Commerce.  They often hand out tax breaks to companies that move plants to their city.  Now you, as a borrower or broker, never have to worry about the CDC.  Your SBA 504 lender will find them and bring them to the table. 

This piggyback second mortgage is fully-amortized over 20 years, and it enjoys a low-low fixed rate for the entire twenty year term!  Why is the interest rate so low?  Because it is guaranteed by the SBA, a department of the Federal government.  You will often see that the fixed interest rate on the conventional first mortgage is pretty low, say 5.5%, but the rate on second mortgage, say 5.25%, is even lower, and that low interest rate is fixed for the entire 20-year term.  The borrower’s blended rate in this example is around 5.4%, a wonderful rate.  The SBA 504 loan program is terrific.

The conventional first mortgage cannot exceed 5/9th’s of the approved financing.  The SBA-guaranteed second mortgage makes up the remaining 4/9th’s of the approved financing.  The example below will help you to understand.


Bob’s Trucking Company, a seven-year-old company, wants to buy a depot to house and repair its trucks.  The purchase price of the depot building is $1,000,000.   Since the company is older than three-years-old, the company qualifies for 90% LTV financing.  In other words, they only have to put down 10% of the purchase price.    By the way, if the company was younger than three-years-old, it would only qualify for 70% LTV financing.  Bob’s Trucking applies just once to 504 Loans Are Us, Inc., a private finance company that specializes in SBA 504 loans.  The specialty finance company arranges for First Neighborhood Bank to make a conventional first mortgage loan of $500,000 that is fixed at 5.875% for the first five years.  The loan is amortized over 25 years, and it has a balloon payment after 10 years.  The specialty finance company also arranges for Neighborhood Community Development Corporation, the business development arm of the City of Neighborhood, to make a 20-year, fully-amortized, fixed rate loan of $400,000 at just 5.75%.  The specialty finance company gets the second mortgage guaranteed by the SBA and arranges to sell the second mortgage in the secondary market to an investor who loves the fact that the loan is guaranteed by the Federal government.  Bob’s Trucking Company doesn’t care about all of these behind-the-scenes machinations.  They just applied once to the specialty finance company, and the 504 loan company took care of everything.  Now they are moving into their $1 million new facility, and they only had to put down $100,000 (10%).  Wow.  Best of all, they will now enjoy a low-low fixed rate loan.

You can find scores of SBA 504 lenders by submitting your commercial loan application through C-Loans.  Just click the Apply Now button above, and be sure to click the “I want an SBA loan” checkbox on your application.

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