Mitigation of credit risk: Lenders have first lien position and typically a 50% loan-to-value ratio, minimizing collateral risk. The SBA can realize on its collateral only if the lender is paid in full.
Management of Overall Lending Limits and Industry Exposure: With 504, smaller banks can entertain larger projects. Even larger banks can limit their exposure to certain industries and/or to a particular borrower. The reduction of CRE loan concentration on your balance sheet reduces regulatory concerns.
Can Assist More Customers: Leverages lending capacity across more borrowers and diversifies default risk and reduces loss in the event of default.
Gain New Customers SBA 504 loans are designed to finance growth companies, and an entrepreneur who is investing in a permanent facility is often entering into his largest business-related loan. An SBA 504 loan often becomes the basis of an entire banking relationship.
Active Secondary Market: There is an active secondary market for 504 first mortgage loans, so banks can reduce their exposure to zero and enhance their non-interest income while retaining the customer’s primary banking relationship.
Strengthening of Core Earnings: Pricing of the bank’s loan is at its discretion. 90% financing also means that more of the customer’s funds remain on deposit. The bank is able to earn fees and interest on the interim loan, and generate fee income from sale premiums and loan fees if it chooses to sell the first mortgage loan in the secondary market.
CRA Credit: Banks that participate in SBA 504 loans are eligible for Community Reinvestment Act (CRA) credit on certain projects.