SBA 504 loans are a specific type of small business loan used for large purchases. Most of the time, these loans help small businesses purchase real estate for owner-occupied properties. Sometimes, SBA loans provide the funds needed to purchase heavy machinery, such as construction equipment.

In the past decade, 504 loans have become popular as a way for owners to expand their businesses without putting too much financial stress on their day-to-day operations. What are the benefits of this type of loan and how does SBA financing work?

Why Do Small Business Owners Like SBA 504 Loans?

There are several advantages of 504 loans compared to other options. To understand why they’re exciting, there are a few terms you have to know.

Fixed Interest

First, this option has fixed interest rates. That means that you don’t need to worry about interest fluctuating throughout the loan. Most of the time, this provides significant benefits because your business can avoid the effects of inflation on loan rates.

Amortized Funding

Another term you need to know is “fully amortized.” When a loan is amortized, it means the payments are calculated in a way that balances out interest and principle. It keeps your payments stable every month instead of causing a difficult “ballooning” situation. Running your business smoothly is easier when you can count on stable monthly payments.

Below-Market Interest Rates

SBA 504 loans are also popular because they provide interest rates that are below market levels. For large purchases such as real estate and heavy machinery, lower interest rates can save you a huge amount of money in the long run. Even one or two percentage points can mean tens of thousands of dollars saved.

Long Terms for Repayment

A final benefit of small business loans is that you have a lot of time to repay them. Most 504 loans offer terms of 25 years. When you can divide the purchase price of the property over that long period, many small businesses can buy real estate. Your business benefits and your finances stay healthy.

How Can You Use SBA 504 Loans?

As mentioned, 504 loans are available for large-scale purchases, such as heavy machinery or real estate. If you’re going to buy equipment with this financing, it needs to be something that will last decades.

For real estate, you’re not limited to property purchases. You can pay for new construction, buy land in preparation for future development, or remodel existing buildings. SBA loans also work for refinancing.