What a 25-Year Term on SBA 504 Loans Means for Small Business Owners

September 25, 2018

Earlier this year, the SBA made the first major change to its 504 loan program in over 30 years: It added a 25-year term. Now, small businesses applying for a SBA 504 loan can choose from a 10-, 20- or 25-year debenture.

What’s Different About a 25-Year SBA 504 Loan?

The short answer is that nothing really separates a 10-, 20- and now 25-year SBA 504 loan except for rate of repayment. The requirements, eligibility, funding and application process are all exactly the same.

The fee structure for 25-year SBA 504 loans is the same as the 20-year, and the voluntary prepayment penalty schedule stays the same, with no prepayment penalty after 10-years.

Here’s a quick summary of the program:

  • Used For: Owner-occupied land, buildings, improvements, construction & long-term equipment
  • Eligible Businesses: Under 100–1,500 employees (depending on the industry) or annual revenue under $750,000 – $38.5 million (depending on the industry) or under $15 million in net worth or $5 million in net annual income
  • Available Amounts: $125,000 – $20+ million
  • Available Repayment Rates: 10, 20 and 25 years

Why Did the SBA Make This Change?

Sometimes, it can be difficult to understand the thinking behind the changes made by government agencies. But the SBA is the exception, and their thinking behind introducing the 25-year term for SBA 504 loans is clear as day.

Here’s what SBA Administrator Linda McMahon had to say about the new 25-year loan:

“This option for extending the payment cycle by an additional 60 months gives small business borrowers the opportunity for lower monthly payments, which can significantly help their cash flow. This increased flexibility in their loan terms will put them in a better position to manage their capital and face challenges like rising operating expenses.”

In case you missed that, we’ll say the most important bit again:

“lower monthly payments […] can significantly help their cash flow”

Cash Flow Benefits of a 25-Year Loan

Richard Branson called cash flow “the life blood of business,” and he’s absolutely right. In fact, research suggests that 25% of small businesses fail due to cash flow problems.

So, any option that lets business owners keep more cash in the bank is worth considering.

The new 25-year SBA 504 loan gives small business owners the ability to make critical investments in growth, while maintaining a more positive cash flow.

What exactly does that look like?

Here’s a table that looks at different borrowing amounts, with 20 and 25 debentures. A 25-year SBA 504 loan typically has an interest rate of around 0.25% higher than a 20-year loan, so this table assumes a 5.5% rate for a 20-year loan, and a 5.75% rate for a 25-year loan.

Loan Amount Interest Rate Monthly Payment Monthly Cash Flow Savings Annual Cash Flow Savings
20 years 25 years
$500K

5.5% /
5.75%

$3,439 $3,146 $294 $3,527
$1M $6,879 $6,291 $588 $7,054
$5M $34,394 $31,455 $2,939 $35,269
$15M $103,183 $92,113 $11,070 $132,840

 

Even with the program’s low down-payment and fixed-interest rates, taking on a SBA 504 loan often comes at times of financial stress for many small businesses. The 25-year option can help to lower that stress.

It can preserve hundreds – or even thousands – of dollars in cash flow every month, leaving small business owners with flexibility that can be helpful, or in some cases essential.

 

When Is the 25-Year SBA 504 Loan Available?

Right now. Any SBA 504 loan approved after April 2, 2018 is eligible for the new 25-year term, including real estate and equipment acquisitions, upgrades, repairs or refinancing.

 

How to Get Started

Contact our team of qualified originators, who are experts at helping small business owners get approved for SBA 504 loans that can help them compete, grow and succeed.