Comparing Conventional and SBA 504 Loans

One of our regular readers, Ric Moody of Coldwell Banker Commercial Heritage  (937.287.0072) told us that he forwards the BizCap Report to all agents within his company so that they can use the report as a tool to help clients when purchasing owner occupied commercial property. Ric went on to make the suggestion that we provide a comparison between conventional financing and SBA 504 financing. Ric, that is a great suggestion and we’re happy to provide the following.

Let’s Get Started.

Sarah, a small business owner who has been leasing her current facility, has a growing business which has outgrown its space. A new larger building would allow her to invest in additional equipment, hire employees, and launch a new product line. Estimates are that the cost to acquire the necessary land and construct this new building would be $1,000,000.

The Conventional Loan

Sarah met with her loan officer at her lending institution.  Her loan officer proposed a conventional loan structure. Sarah could finance 80% or $800,000 with a loan from that lender.  The loan would have a 10 year term and a 20 year amortization, and Sarah could lock in a fixed interest rate for 10 years. But, Sarah would have to come up with cash equity of 20% or $200,000 and while she has those funds available, she wants to keep as much of this cash in her pocket to help finance the operational growth of her business over the coming year. The following estimate presents a summary of the transaction.

$1,000,000 Capital Project - Conventional Financing Only 
Conventional Lender 1st Mortgage Loan (80% LTV)$800,000
Equity Injection (20%)200,000
1st Mortgage Loan - 20 Yr Amortization, 10 Year Term & Rate5.4%
Monthly Payment
$5,458
Annual Payments65,496
Annual Interest Paid - 1st Year
42,639
Principal Balance Owed at end of Year 10
$505,224
Cash Out of Pocket Paid at end of Year 1
$265,496
Cash Out of Pocket Paid at end of Year 10
$854,962

 

Total cash out of pocket at the end of the first year just to finance the building with this structure is just over $265,000.

She is interested in lowering her cash out of pocket even further, and she would like to lock her interest rate longer than 10 years.

The SBA 504 Loan

Ric told Sarah about BizCap’s SBA 504 loan program and explained to Sarah that with this small business loan program she could keep more cash in her pocket and lower the overall cost of borrowing for this project.

Sarah called Gary Fischer about her project. Gary is a Loan Officer with extensive experience helping his clients get the financing they need to grow their businesses. He sat down with Sarah and reviewed her plans. Together, Gary and Sarah determined that a SBA 504 loan would be just what she needed. A BizCap SBA 504 loan could finance 40% of the project with a low fixed interest rate and a 20 year term. Sarah would need to obtain a first mortgage loan for 50% of her project from her lending partner. Sarah was encouraged because with this program she only needed to use $100,000 of her company’s cash to fund the remaining 10% of the project’s cost.

The following shows the details of this project funded with a SBA 504 loan.

$1,000,000 Capital Project - Conventional & BizCap SBA 504 Financing
Conventional Lender 1st Mortgage Loan (50% LTV)
$500,000
SBA 504 Loan (40% LTV)
400,000
Equity Required (10%)
100,000
1st Mortgage Loan - 20 Yr Amortization, 10 Year Term & Rate
5.40%
Monthly Payment
$3,411
Annual Payments
40,935
Annual Interest Paid - 1st Year
26,650
Principal Balance Owed at end of Year 10
$315,765
BizCap SBA 504 Loan - 20 Year Amortization, Term & Rate
4.94%
Monthly Payment
$2,705
Annual Payments
32,465
Annual Interest Paid - 1st Year
20,075
Principal Balance Owed at end of Year 10
$255,774
Totals (1st Mortgage & SBA 504 Loans)
Monthly Payments
$6,117
Annual Payments
73,400
Annual Interest Paid - 1st Year
46,725
Principal Balance Owed at end of Year 10
$571,539
Cash Out of Pocket Paid at end of Year 1
$173,400
Cash Out of Pocket Paid at end of Year 10
$833,997

 

Total cash out of pocket in this scenario at the end of the first year to finance this project is just over $173,000. This option preserves over $80,000 cash in Sarah’s pocket at the front end, when she really needs it. And, this option locks in 40% of her project with a fixed interest rate for the entire 20 year term of the loan.

Pro’s:

  • Lower Cash Out of Pocket for Owner at Project funding & at end of Year 10
  • Finance Larger Portion of the Project (90% vs 80% LTV)
  • Lower Blended Interest Rate (Rate on SBA 504 Loan is lower than Conventional Loan Interest Rate)
  • Locks in 40% of Project Sources with a 20 Year Amortization, Term & Rate

Con’s:

  • 2 Loans (Conventional Lender & BizCap)
  • Slightly Higher Monthly Payments (only due to financing 90% of Project, not 80%)

The Decision

Sarah decided to move forward with a project financing structure that involved both her conventional lender and a BizCap SBA 504 loan.

Want us to look at your project and show you how an SBA 504 loan could save your company money? Give Gary Fischer a call at 937.531.7038 or email Gary at gfischer@countycorp.com.