If money grew on trees, we would rake it up every autumn and be in business. But we all know that making and using money wisely is not a natural act. For example, small business owners looking to expand may find their growth plan — even a moderate one — exceeds the limits of their cash and financing ability.

If you’re an owner who needs to expand your business; ask yourself, “Can I afford this?” Competition may drive this decision: Do you expand now and boost sales? Will waiting allow competitors to race ahead? Or would postponing and conserving your resources strengthen your company to lead a future sales surge in your industry?

It’s wise for small business owners to investigate financial options before making a “go-or-no-go” decision. You need a knowledgeable financial advisor you can trust; one who helps you compare different small business loan programs. This trusted advisor is probably a local banker. Bank commercial lenders should know the array of alternative small business loans in case their regular commercial loan products are not right for you.

Get ready to learn about the U.S. Small Business Administration programs. (The rules are simpler than you may think.) The SBA exists to help small businesses. Its two most popular loan programs are the SBA 504 and the SBA 7(a). These loans are clearly distinct from one another.

The SBA 504 loan program can finance fixed assets, that could include  owner-occupied real estate  or equipment. Owners may use their 504 loan to buy an existing building, purchase major equipment (such as an expensive drill press), or buy a piece of land and construct a building. Project sizes range from $125,000 to $20 million or more. Repayment times may stretch to 10 years for equipment and up to 25 years for buildings and real estate.

The SBA 7(a) loans are geared to help borrowers buy a business from someone else or obtain working capital. Furniture and fixtures in a leased property may also be financed with 7(a) funds. Five million dollars is the maximum 7(a) loan amount. .

What about interest rates and collateral? A 504’s interest rate is fixed. The 504’s locked-in rate is particularly attractive now when interest rates are near record lows. The 504 borrower will be paying the current low rate even if interest rates climb while he or she is repaying the loan.

The interest rate on a 7(a) loan floats and is generally tied to  prime. Additional collateral is often required when the business assets do not fully collateralize the loan. Collateral is required at 90 percent of the loan amount and may require a mortgage on the owner’s personal residence. The 7(a) collateral requirement could be a hurdle if there are multiple partners in a business whose homes have different values. Under this circumstance, the 504 loan — which does not take a lien on outside collateral or a personal home — may be the best choice.

Also, fees on a 7(a) loan will rise with the project size. For example, the guaranty fee for a loan between $700,000 and $1 million is 3.5 percent. If the project exceeds $1 million, the fee jumps to 3.75 percent.

SBA 504 loan fees stay flat as a percentage when the loan amount increases.  A $1.25 million commercial real estate project can command a 7(a) fee of over $27,800. The 504 fee would be just over $13,300.

The down payment on a $1.25 million project?  The typical down payment is 10 percent to 20 percent for a SBA 7(a) loan compared to 10 percent with a 504. So — looking at our $1.25 million project example — a down payment for a 7(a) could be $125,000 to $250,000 from the business owner; while a 504 borrower pays $125,000. If there is a difference in the down payment, the 504 borrower reaps the savings. Down payments on either SBA loan are likely to be less than the 20 percent or higher commanded by a regular commercial loan.

Financing a small business is a big deal for the owner. Fortunately a well-prepared business owner — working with a trusted local banker — can confidently navigate the loan process.

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