SBA 504 Loans Offer Lower Fixed Interest Rates
Kelley and Steve Cherry were so pleased with the experience of getting a loan to buy a commercial building in Red River that they want to buy another building in the same way.
The couple worked with Century Bank to secure a 504 loan from the US Small Business Administration to purchase the building they previously rented for their 3-year-old ice cream and candy store, L’il Willie’s Shenanigans. They hope to use the same strategy to purchase the building from which they have operated Shotgun Willie’s Café for a decade.
The appeal of 504 loans is that interest rates are set at a significantly lower rate than traditional banks for commercial real estate loans, and borrowers receive plenty of help from lenders and certified development companies that rate 504 SBA loans. The non-profit Enchantment Land Certified Development Company performed this role for the Cherrys.
A business owner can only use SBA 504 financing to purchase, build, or renovate real estate that the business will occupy; purchase, test and install equipment with a useful life of at least 10 years; or refinance a home or equipment loan. It is one of many low interest loans that a commercial banker considers when determining the best option for a business.
504 loans are initiated and shaped by the bank and involve the business owner and the SBA-affiliated certified development company. The owner pays a minimum down payment of 10% and a maximum of 20%.
Because they’d owned Shenanigans for less than two years when they applied for the loan, the Cherry’s put down 15%, resulting in a monthly payment that’s not that different from what they paid for. their lease. “But it’s nice to pay for something that’s going to be yours,” Kelley said.
The SBA finances 40% of the total loan at a reduced interest rate for a fixed term of 10, 20 or 25 years, and the bank finances the balance.
“The interest rate was almost half of what a commercial real estate loan would be,” Steve said.
The SBA’s share of the Shenanigans 20-year loan cannot be prepaid without penalty. The interest rate for the bank’s portion of the loan may fluctuate over the life of the loan, but there is no penalty for paying it off early.
While the couple jointly own and run the two businesses, Kelley is mostly focused on the shenanigans and Steve is the cafe. “We try not to be just your regular t-shirt store with mugs that say ‘Red River,'” Kelley said of Shenanigans, which sells ice cream, baked goods, coffee, jewelry and other products. geared towards locals and visitors alike and is known for its small fried pies. “We sell some pretty much every day,” Kelley said.
Since securing the loan, the couple have repainted the building and added a patio, Steve said. “We’re putting money back into the business.”
Small business owners considering a 504 loan should understand that the process takes longer than a traditional business loan, Kelley said.
“If you have the patience, it’s a good program, especially for start-ups,” she says. “As a buyer, the more responsive and quick you can be with your information, the better, the faster it goes.”
This column was distributed as part of the Finance New Mexico Project, which connects individuals and businesses with financing skills and resources for their business or idea. To learn more, visit www.FinanceNewMexico.org. The Office of the Executive is a guest column providing advice, commentary, or information on resources available to the business community in New Mexico. To submit a column for review, email email@example.com.