SBA’s second largest loan program may run out of funds this week

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Brief description of the dive:

  • The Small Business Administration’s 504 loan program could run out of congressional funds as early as Friday. American banker reported on monday… The program can then suspend activities until the start of the new fiscal year on October 1st.
  • SBA 504 loans provide 10-, 20- or 25-year financing for businesses looking to make major investments in fixed assets, such as buying real estate or equipment, or building buildings.
  • The annual lending budget for 504 loans has been capped at $ 7.5 billion since 2016 and is in danger of being exhausted for the first time since then, said American banker Rhonda Poynton, president and chief executive officer of the National Association of Real Estate Companies (NADCO).

Dive Insight:

Demand for SBA 504 loans is higher than ever, but funds are shrinking rapidly. The economic troubles associated with the COVID-19 pandemic have forced many companies to seek funding sources such as the 504 program. At the same time, low interest rates are forcing many companies to close such deals in the near future and provide favorable rates for up to 25 years.

“There is no doubt that the program will reach its limit, the only question is when,” Poynton told American Banker. “Conservatively, based on the number of SBA approvals in the last couple of months, we assume that the regular 504 program could reach the congressional cap as early as September 3rd.”

The attractiveness of 504 loans increased sharply in December when Affected Small Businesses, Nonprofit Organizations and Facilities Act became law, cutting the typical user fees associated with 504 loans for balance of fiscal year 2021… The law also increased the size of the loan that borrowers can refinance from 50% to 100%.

SBA loans require a 10% down payment from the borrower. Another 40% of funding comes from a certified development company and 50% from a financial institution. These loans usually do not exceed $ 5 million. according to NerdWallet… The 504 loans are SBA’s second most popular offering after the 7 (a) program, which is less restrictive and often used as working capital.

The demand for 504 loans is expected to remain strong throughout the 2022 fiscal year. NADCO is in favor of Congress increasing the pool of funds for 504 loans in the future, but it is unlikely to last until the last month of fiscal 2021.

Poynton noted that tThere is a break in the Senate until September 13, and in the House of Representatives until September 20. “We will continue to work with Congress to address the constraint issue when each body returns to session, but we strongly believe that small businesses that deserve access to capital through the 504 program will be put on hold,” she said.

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