It takes money to make money, and investing in your small business is a sure way to make profits and make more profit. There’s no growth without investment. The problem comes with managing business costs and investing while staying afloat, especially if your enterprise is small and is facing financial difficulties. That’s where a Small Business Administration (SBA) loan comes in handy.

A loan can help you rebuild your business, expand, buy the necessary equipment, replenish your inventory, or improve your cash flow to maintain and retain your employees. But, getting a loan can be tricky, especially if you’re new to the process or prone to making mistakes that might make lenders unwilling to give you a loan.  Even after getting the SBA loan, you might still end up using the loan for personal needs, which is against the “laws” of business loans.

Before we discuss the three mistakes to avoid when applying for an SBA 504 loan, as described in this article on the three mistakes to avoid when applying for a Small Business Administration (SBA) loan, let’s look at what a SBA 504 loan is first.

What Is a Small Business Administration (SBA) CDC/504 Loan?

The U.S Small Business Administration (SBA) assists small businesses to get the funding they need by setting rules and guidelines for loans and reducing lender risk. The SBA makes it easier for qualifying small businesses to get loans from lenders while protecting the lenders against non-compliant or fraudulent loan beneficiaries.

According to the sba.gov website, the SBA CDC/504 Loan Program “provides long-term, fixed rate financing up to $5 million for major fixed assets that promote business growth and job creation.” The loads are available through Certified Development Companies (CDCs) which are certified and regulated by the SBA.

SBA 504 Loan Eligibility Requirements:

  • Operate as a for-profit company in the U.S. or U.S. territory.
  • Have a tangible net worth of less than $15 million.
  • Have an average net income of less than $5 million after federal income taxes for the two years preceding the application.

How to apply for an SBA-backed 504 loan:

SBA-backed and guaranteed loans, including the 504, are advantageous over other regular, non-guaranteed business loans in terms of better terms, continued counseling and support, lower down payments, flexible overhead requirements, and non-collateral requirements for some loans.

Now let’s look at the 3 common mistakes that people make when applying for an SBA-backed loan.

1. Not Having Enough Down Payment in the Bank

What Are the Three Mistakes to Avoid When Applying for an SBA Loan? | BFC Funding

To qualify for and get any type of SBA loan, you must have a down payment in your bank, usually 0f 10% to 30% of the loan you want to acquire as a form of evidence besides your credit score, to alleviate lenders’ risk. The down payment varies by loan type and your qualifications as the borrower; however, in most cases, an SBA 504 CDC Loan requires a down payment of 10%. Some SBA loans like CAPlines and Disaster Loans don’t require down payments whatsoever.

It’s worth noting that the SBA doesn’t lend out loans –instead, it works with lenders like banks and CDCs (Certified Development Company) to extend loans to small businesses. Thus, down payment requirements are based on your company’s cash flow capacity and collateral value.

Here’s a table of the down payments for various SBA loan programs:

 SBA Loan Program Loan Amount  Down Payment
 7(a)  Up to $5 million            10%-30%
 504/CDC                           Up to $5.5 million and more  10% (in most cases)
 Microloans      Up to $50,000   20%-30%

SBA 504/CDC Loan Down Payment

At Business Finance Capital (BFC), we are a Certified Development Company (CDC) non-profit corporation promoting economic development within the Greater Los Angeles business community through SBA 504 loans.

As a business owner, you are expected to pay a 10% down payment of the SBA/CDC 504 loan amount. If yours is a start-up, you’re likely to pay around 20%. You can qualify for up to $5.5 million to finance major fixed assets like commercial equipment and invest in real estate.

Since BFC is a CDC, when you come to us, we will fund 40% of the loan amount alongside the 10% or so down payment, and the 50% will come from a third-party lender, but you must meet the SBA 504 loan requirements and eligibility, mentioned earlier, to qualify for one.

2. Not Knowing How To Hold Title to Property

What Are the Three Mistakes to Avoid When Applying for an SBA Loan? | BFC Funding

Commercial real estate property is one of the soundest investments you can ever make as a small business enterprise, and the most convenient way to achieve this is through a 504/CDC SBA loan. You can enjoy fixed loan rates, tax breaks, and total control of your property. But, to qualify for a 504 SBA loan, you must have collateral with a clear and explicit form of title vesting/holding.

But, most small business individuals looking to invest in real estate using 504/CDC loans don’t have enough knowledge or clear indications of how to hold title to their investments. You might find yourself in a predicament where a lender or CDC could end up denying you a loan, you lose your property, or you lose out on benefits like tax breaks.

The way you opt to hold your title should match the reason(s) for buying the commercial real estate property and what should happen in case you run bankrupt or are unable to repay the loan.

Here are some ways of holding title:

  • Sole Proprietorship
  • Joint Tenancy
  • Joint Tenancy With Right of Survivorship (JTWRS)
  • Tenancy in Common (TIC)
  • Partnership
  • Living Trust
  • Corporation
  • Limited Liability Company (LLC)

Each way of holding title confers you specific rights to your commercial property. While there’s no right or wrong title vesting, it’s advisable to consult legal, accounting, or tax advisors for guidance on the way that best suits your investment preferences.

3. Unresponsiveness to Lenders’ Needs List

What Are the Three Mistakes to Avoid When Applying for an SBA Loan? | BFC Funding

Every lender and loan program has a list of requirements and eligibility requirements you must meet to qualify for an SBA loan. Some small business borrowers fail to provide the necessary documents like their books and collateral and miss out on loans. At BFC Funding, we expect you to avail the list of requirements in a timely manner to qualify for our 504 SBA-backed loans.

Eligibility requirements vary depending on business type, ownership type, and area of operation since they vary among states. To qualify for an SBA loan, you must meet SBA size standards, have a workable and viable business purpose or investment, and be able and willing to pay.

While every lender has its own SBA eligibility requirements, here are some common ones:

  • Your business must be officially registered, operating legally, and for-profit.
  • The business must be physically located and operating in the U.S. or its territories.
  • As the business owner, you must have invested equity (time or money) into the business.
  • You’ve exhausted all other financing options/alternatives.

The Bottom Line

A Small Business Administration loan is a sure way to propel your business to the next level. It’s one of the best ways to acquire new equipment or commercial property, increase cash flow, retain workers, or boost your inventory. However, not knowing how to hold title to your commercial property, failing to meet lenders’ eligibility requirements, and not having a down payment bars many borrowers from getting these loans; This shouldn’t be the case. BFC is here to help.

Are you a small business in the Greater Los Angeles area and looking for a 504/CDC SBA loan? Business Finance Capital (BFC) is your go-to Certified Development Company (CDC). Please don’t hesitate to contact us today and get the help you need to get started with your SBA 504 loan.