Cost of capital6 min read
What ten percent down actually costs
Low equity is not free equity. Here is the honest comparison between a 504 stack and a conventional owner-user loan over a ten-year hold.
The SBA 504 pitch is easy to say and easy to oversell: buy your building with ten percent down. It is true, and it leaves a great deal of capital inside the business where it can earn a return. But the structure is not free, and a lender that presents it as free is not doing the arithmetic in front of you.
What you actually pay for the leverage
- CDC, SBA and processing fees, financed into the debenture rather than paid at closing — real debt, on which you pay interest for twenty-five years.
- An ongoing servicing component inside the debenture rate.
- Two lenders, two sets of conditions, and a longer path to a closing date.
- Prepayment restrictions on the debenture that decline over the early years and constrain your options in the meantime.
What you get for it
- Twenty to twenty-five percent of the project cost that stays in your business instead of sitting in a building.
- A fixed rate on roughly forty percent of the project, for the full twenty-five years — no repricing, no maturity risk on that slice.
- A first mortgage at fifty percent leverage, which is where conventional lenders are at their most competitive.
The comparison nobody publishes
On a $2.66M project, a 504 stack and a 70% conventional loan produce a broadly similar monthly payment — the 504 borrower simply borrows more of it. The difference is where the capital sits and what happens at year seven.
| SBA 504 | Conventional 70% | |
|---|---|---|
| Cash at closing | $266,000 | $798,000 |
| Debt at closing | $2,394,000 | $1,862,000 |
| Fixed for the full term | 40% of the project | None |
| Refinance risk at year 7 | On the first mortgage only | On the whole loan |
| Time to close | 60–90 days | 30–55 days |
The right question is not which loan is cheaper. It is what the extra half a million dollars is worth inside your business over ten years.
For a distributor whose working capital compounds into inventory turns, the answer is usually emphatic. For an established practice with cash it cannot deploy, the conventional loan and its faster, quieter closing may be worth more than the leverage. Both are defensible; only one of them is right for your balance sheet, and the way to find out is to model it rather than to be told.