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SBA 504 Myths That Can Stall Business Growth

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Closeup on notebook over vintage desk surface, front focus on wooden blocks with letters making Business Loan text. Business concept image with office tools and coffee cup in background

Small businesses only start small. As profit margins increase, so does the need to broaden operations to support continued growth. Facility expansion and technology upgrades are often part of an effective growth strategy. Yet, when considering financing options for a new location, machinery or equipment, many business owners shy away from considering a Small Business Administration (SBA) 504 loan due to misconceptions about the qualification and application process.

Let’s set the record straight by dispelling three common SBA myths.

Myth #1: SBA loans are only for people who can’t qualify for conventional business loans.

Minimum qualification requirements vary by SBA loan. Small businesses who operate on a for-profit basis and have a tangible net worth of less than $15 million and an average net income of no more than $5 million may qualify for an SBA 504 loan.* Most SBA loans require borrowers to have a solid business plan, strong business financial statements, and a good personal credit history.

Myth #2: SBA loans require too much paperwork.

The SBA authorizes a bank partner, aka Certified Development Company (CDC), to handle loan documents on behalf of the business owner and the bank. Unlike conventional business loans, an SBA 504 loan applicant works with a dedicated CDC commercial loan officer, who completes the loan application using the information provided by the business owner. CDCs are nonprofit corporations whose goal is to promote economic development in the local community. The CDC commercial loan officer coordinates the financing, from application to funding.

Myth #3: SBA loans have too many fees.

SBA loans have low out-of-pocket costs, which help preserve cash flow. An SBA 504 loan has an application fee, but other loan costs are rolled into the below-market interest rate loan and amortized over the life of the loan.

The CDC structures the project financing package for SBA 504 loans, which includes monetary contributions from three parties:

  1. York Traditions Bank – 50% conventional first mortgage financing
  2. Certified Development Company (SBA backed portion of the loan) – 40% second mortgage financing
  3. Small business owner (Down payment requirement) – 10% contribution**

For example, ABC Company secures a $1 million SBA 504 loan to pay for facility renovations. The 50/40/10 funding package is split according to the following breakdown:

  • $500,000 – York Traditions Bank financing
  • $400,000 – SBA portion of the loan
  • $100,000 – ABC Company’s down payment

The way loan proceeds are used determines repayment terms. For example, loans used to fund commercial real estate may have a repayment term of 20 years, while funds used for equipment purchases, e.g., X-ray machines, 3D imaging equipment, etc., may have a term of 10 years.

A low, fixed-rate SBA 504 loan can help conserve working capital and provide the financing needed for commercial real estate and equipment purchases. It’s also possible to use funds to refinance these assets. Would you like to learn more? Please contact Michael E. Huson, Managing Director – Business Services, at 717-747-2607 or mhuson@yorktraditionsbank.com.


* Businesses must have an average net income of no more than $5 million in the preceding two federal income tax years. Additional eligibility criteria may apply.
**Startup and special-purpose properties may require a borrower contribution of up to 20%.

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