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504 Loans vs Commercial Bank Loans

504 Loans Vs. Commercial Bank Loans

Owning commercial real estate and other fixed assets may not otherwise be a reality for many small business owners, but 504 loans often make this possible. By allowing you to make a smaller down payment and keep your cash flow steady, you can instead focus on growing your business instead of watching your cash being held hostage in a non-income producing asset.

Here’s how our 504 loans stack up versus ordinary commercial loans you can get at the bank:

 NEDCO SBA 504 LoanOrdinary Bank Loan
Loan amountYou receive up to 90% of the total cost of the entire project75-80% of appraised value or the purchase price, whichever is less
Equity10% of total project cost20-25% in addition to closing and soft costs
Term1st mortgage: 20 – 25 years
2nd mortgage: 20 years
No balloons – only rate resets.
Variable. Could be anywhere from 5,7,10, or even 15 years, and often balloons.
Amortization1st mortgage: 20-25 years
2nd mortgage: 20 years
Typically 3 years, and fully amortizes.
15-20 years.
Pricing1st mortgage: Competitive fixed or variable rates.
2nd mortgage: Typically .5 - .75% less than competitive rates and remains fixed for 20 years. For commercial real estate, this is the least expensive financing option.
Both loans can be assumed.
The blended effective rate of both mortgages is almost always lower than ordinary financing and remains fixed for a longer time period.
Competitive fixed or variable rates.
Loans are usually not assumable.
Personal GuaranteesThey are present, but for people with strong credit scores, they can be limited to pro rate ownership.Present more often than not.
Prepayment Penalty1st mortgage: 5 and 10-year options which allow you to pay 20% of the principal each year without incurring any penalties.
2nd mortgage: 10-year, but it’s less expensive than the 1st mortgage, so it makes more sense to pay that one off with excess cash.
Sometimes they are present, but most often not.
Debt Service CoverageAt least 1.0x frequently without maintenance.Usually 1.2x or higher with maintenance.
Fees1.5% on the first mortgage and 1.0% on the second. Blended, this comes to 1.27%, but may be reduced if you have a stronger credit score.Typically 1.0% of the total loan amount.
Personal Credit ScoresScores less than 600 usually not accepted.Scores must usually be 650 or higher.

Contact NEDCO if you would like to learn more about 504 loans or to apply for financing!