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SBA Adds a 25-Year Term on SBA 504/CDC Loans—and More Savings For You

Priyanka Prakash

Staff Writer at Fundera
Priyanka is a staff writer at Fundera, reporting on business financing, law, and news. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator tech startup. She loves helping entrepreneurs launch, run, and grow their businesses.

If you ever wanted to apply for an SBA 504/CDC loan, there’s a whole new reason to gather your application materials—the US Small Business Administration has extended SBA 504/CDC loan terms of 25 years for qualified small business borrowers. This great news just adds to the many reasons why there are so many advantages of SBA loans.

For business owners looking to finance the purchase of land, office space, equipment, and other fixed assets, SBA 504/CDC loans are one of the best options available. SBA lenders and banks lent businesses more than $5 billion in 504/CDC loans in 2017. Normally, the 504 loan loses the spotlight to its more popular cousin, the SBA 7(a) loan program—but 504 loan programs often have a greater impact on a business’s local ecosystem.

And now that the SBA has taken active steps to increase the affordability and popularity of SBA 504/CDC loans with 25-year old extended loan term, entrepreneurs have even more chance to make an impact.

These loans often add thousands—even millions—of dollars to the local economy, since businesses in need of capital-intensive assets often hire lots of people and engage in extensive modernization and renovation, too.

SBA 504/CDC loans are already some of the most affordable loans that are available to an entrepreneur. But with the SBA’s recent addition of the 25-year term, you might see these loans become more affordable and more popular with small businesses.

More on the New 25-Year Term for SBA 504/CDC Loans

Now that the SBA has added a 25-year term option for 504/CDC loans, when do the changes start? The good news is that they’re already in effect. Any loans approved after April 2, 2018 are eligible for the new term option. (Unfortunately, if you were approved before that, you’re not grandfathered in.)

This marks the first major change to the program in more than thirty years. Since 1986, 10- and 20-year terms on 504 loans have been available to small businesses. For the first time, the SBA is creating a standalone fund just for 25-year loan requests to ensure that there are enough funds to cover the new loan term.

Two main motivators drove this term change. In its official announcement, the SBA said that it wanted to bring 504 loans more in line with traditional (non-SBA) commercial mortgages, which usually have 25-year terms.

But, more importantly, the SBA wanted to lower monthly payments for small business owners by extending the term. In the announcement, William Manger, Associate Administrator for the SBA’s Office of Capital Access, said, “By extending the payment cycle by 60 months, SBA expects that the new instrument will decrease the monthly payments for the small business borrower and will provide flexibility for small businesses to better manage critical operating capital.”

And he’s right—that’ll definitely help out small business owners who need to plan payments and manage cash flow. Melissa Ng, who assists with SBA loans at Fundera, adds, “Being able to spread out payments across a 25 year term will be instrumental in helping small businesses better manage cash flow. Other benefits of the loan are unchanged, making the change a win-win for small businesses. For example, the 504 loan will still have a fixed interest rate, avoiding the risk of future rate hikes.”


A Quick Refresher on the SBA 504/CDC Loan Program

If you need to remember why these government-backed loans are so desirable, here’s a fast overview. SBA 504/CDC loans are small business financing for companies that want to purchase land, machinery, equipment, or other capital-intensive assets. As you might imagine, though, it’s not as easy as walking into a bank and asking for a 504 loan.

These highly desirable loans are typically six- and seven-figure loans, with SBA 504/CDC loans capping out at a max of $5.5 million.

SBA 504/CDC Loans typically involve three entities:

  1. SBA Certified Development Companies (CDC): CDCs are nonprofit community-based partners of the SBA that focus on economic development. They lend 40% of the project’s total cost.
  2. The bank or private lender: The bank lends 50% of the project’s total cost.
  3. The borrower: The borrower must usually put down a 10% down payment on the total cost of the project. The SBA requires additional equity for startups and certain specialized loan uses.

There are two primary benefits of the SBA 504/CDC Loan program:

Low fixed interest rates and long loan terms.

  • The maximum interest rates for these SBA loans are set at currently just above 5%—and this beats virtually any other business loan that an entrepreneur could qualify for.
  • The repayment term on the CDC portion of the loan can be 10, 20—or now—25 years, based on the scope of the project and the business owner’s creditworthiness.

In order to qualify for an SBA 504 loan, the borrower must have strong credit (over 700 is ideal, although there’s no official requirement) and a business plan showing that the company will create or retain at least one job for every $65,000 in funding that the SBA approves.

What a New 25-Year Term SBA 504/CDC Loan Option Means for Small Business Owners

The option for a longer loan term is a positive sign for small business owners. Operational costs for businesses are steadily rising, and the Federal Reserve has indicated that it’s ready to hike interest rates again (after already increasing them late last year). That’ll make small business loans more expensive for any prospective borrowers.

Together, these costs can create a cash crisis for businesses—especially younger and smaller companies. The additional five years to repay the debt means lower monthly payments and a significant monthly savings for small businesses, too.

These savings can make a big impact. For example, if a business has a $1 million 20-year loan at a 5% interest rate, the monthly payments are $6,600. The same loan at a 25-year term equals out to $5,846 in monthly payments. That’s more than a $700 savings each month that businesses can use on payroll, marketing, supplies, and other vital business expenses.

The Most Important Thing You Should Note as a Small Business Owner

Business owners should be mindful, though, that the 25-year option is only on the CDC portion of the loan. The CDC funds 40% of the total project cost, but a bank or private lender funds half of the project. Banks and private lenders can set their own loan terms, subject to a 10-year minimum.

This means that small business owners can save on cash flow by requesting a 25-year term on the CDC portion of the loan, but they should be prepared to make larger payments on the bank portion of the loan. In addition, be aware that a longer term means that you’re borrowing money for a longer period of time, so you will pay more dollars of interest over the life of the loan.

Also, not all small business owners will qualify for the new 25-year term. SBA loans are some of the hardest to qualify for, and the SBA and banks particularly scrutinize applications when the borrower requests a longer term. The longer the term that you request, the stronger your credit should be and the more compelling your business plan should be.

Small Business Owners Should Celebrate New 504/CDC Loan Changes

The 25-year repayment term on the SBA 504/CDC loan is a welcome option for small business owners in a cash crunch who want to finance capital intensive projects. Just be prepared for a challenging underwriting process, and understand that the CDC portion of the loan and bank portion of the loan might have different terms.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Priyanka Prakash

Staff Writer at Fundera
Priyanka is a staff writer at Fundera, reporting on business financing, law, and news. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator tech startup. She loves helping entrepreneurs launch, run, and grow their businesses.

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