Certainty for small businesses when interest rates are rising

By Margaret Griffin
Updated 5/3/2022 12:21 PM

The COVID-19 pandemic has given way to a new challenge for small business owners: inflation.

According to the National Federation of Independent Businesses (NFIB) April Economic Report, 31% of business owners responded that inflation was their single most important problem encountered in operating their business -- the highest reading for inflation concerns in this survey since 1981.


During this period of higher inflation and an increasing interest rate environment, the SBA 504 program -- a public-private lending solution for small business owners to buy, expand or refinance major fixed assets -- is a proven financing tool for small businesses. For companies looking to maintain the momentum gained in the early post-pandemic recovery period, the 504 can help improve cash flow, maximize revenue generation, conserve capital, and manage inventory.

Low fixed interest rates to improve cash flow

The SBA 504 program has several borrower-friendly elements, including predictable payments and fixed 20 or 25-year terms. But perhaps the most attractive feature of the program is the below-market interest rate. A lower interest rate means lower and more affordable monthly mortgage payments, freeing up capital to strengthen cash flow and reinvest in the business.

There is also an expectation we will continue to see higher inflation. With an SBA 504 loan, a business owner can rely on putting less money down as part of the 504 loan process, typically 10% equity, compared to conventional lending. Less money down today means you will have more capital now. With increasing prices, the low 504 equity contribution gives you stronger buying power.

Likewise, since the interest rate on the 504 loan is fixed for 20 or 25 years, this mitigates the risk of rising rates and provides predictability in managing real estate costs.

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Capital investment to maximize revenue generation

The 504 loan can be used for the purchase of commercial real estate, equipment and machinery. For small businesses ready to maximize revenue generation, especially those in the manufacturing sector, the addition of new equipment can create growth by supporting the expansion into a new line of product. Additionally, incorporating new equipment can expand capacity for current product lines and streamline operations to increase efficiency through automation.

Low down payment to conserve capital

As interest rates rise, liquidity is paramount. Businesses need additional working capital to purchase inventory, absorb short-term losses, or possibly invest in a potential acquisition opportunity.

The structure of the 504 loan typically requires only 10% equity, compared to around 25% down payment for a conventional loan, which enables the business owner to retain more cash for short-term needs.

Access cash out for inventory

In addition to the borrower-friendly terms of the 504 loan, refinance clients can take cash out for eligible expenses, including inventory, non-owner salaries, rent, utilities and a business line of credit or business credit card debt. The refi is a great option for existing businesses to manage inventory when material prices are rising due to inflation and supply chain issues.

The SBA 504 program has a long track record in helping small businesses and is experiencing record popularity during these economically uncertain times. Now is the time to explore how the 504 program can best serve your business financing needs, through current challenges and beyond.

• Margaret Griffin is EVP and Chief Lending Officer at SomerCor.

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