Dive Brief:

• The Small Business Administration’s 504 loan program could run out of congressionally authorized funds as early as Friday, American Banker reported Monday. The program may then halt activity until the new fiscal year begins Oct. 1. 
• SBA 504 loans provide 10-, 20- or 25-year financing for businesses looking to make big investments in fixed assets, such as purchasing real estate or machinery, or for building construction.
• The annual lending budget for 504 loans has been capped at $7.5 billion since 2016 and is in danger of running out for the first time since then, Rhonda Pointon, president and CEO of the National Association of Development Companies (NADCO), told American Banker.

Dive Insight:

Demand for SBA 504 loans is higher than ever, but funds are dwindling rapidly. The economic challenges posed by the COVID-19 pandemic have forced many businesses to seek out funding sources such as the 504 program. At the same time, low interest rates are pressuring many businesses to make such deals soon, and clinch favorable rates for up to 25 years. 

"There’s no question the program is going to reach its cap, the only question is exactly when," Pointon told American Banker. "Conservatively, based on the rate of approval by SBA over the last couple of months, we’re estimating that the regular 504 program could reach its congressionally authorized cap as soon as Sept. 3."

The appeal of 504 loans jumped in December, when the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act became law, curtailing the typical user fees associated with 504 loans for the remainder of fiscal 2021. The act also lifted the loan amount borrowers can refinance from 50% to 100%. 

SBA loans require a 10% down payment from the borrower. Another 40% of funding is derived from a certified development company, and 50% comes from a financial institution. These loans are usually capped at $5 million, according to NerdWallet. The 504 loans are the SBA’s second-most popular offering behind the 7(a) program, which is less restrictive and often used as working capital. 

Demand for 504 loans is expected to remain high during fiscal 2022. NADCO has advocated that Congress increase the pool of funds for 504 loans in the future, but it seems unlikely to last through the last month of fiscal 2021. 

Pointon noted that the Senate is in recess until the week of Sept. 13 and the House is out until Sept. 20. "We will continue to work with Congress to address the cap when each body returns to session, but we feel strongly that the small businesses that deserve access to capital through the 504 program are going to be on hold," she said.