The 411 on 504s
The 504 loan program from the federal Small Business Administration (SBA) provides long-term, fixed rate financing for the purchase of major fixed assets that promote business growth and job creation – like existing buildings or land, as well as new facilities.
It’s understandable, then, that most people view a 504 loan as a strictly real estate loan. Given that 504 loans can be 504 loans, however, can be used for a “range of assets,” this means they also can be leveraged for the purchase of capital machinery and equipment assets with a “useful remaining life” of at least 10 years.
"Useful remaining life" is not fully defined by the SBA. Industrial-grade equipment is usually able to operate for decades with proper maintenance and parts replacement, and even light-commercial business equipment is usually built to physically function for well over 10 years if properly maintained. So how do you know if your equipment is eligible to be collateral for an SBA 504 loan?
Although equipment “useful lives” are not detailed further, the SBA refers throughout its literature to the "economic life" of real properties. The implication is clear that the physical lives of the properties is not the crucial factor - to put it another way, it doesn't matter how long a machine is physically capable of functioning. Rather, the economic life - the ability of the machine to efficiently produce earnings for its owner - is the benchmark for assessing remaining life.
ASA's Valuing Machinery & Equipment (4th Ed.) defines economic useful life as "the estimated period of time ... that a new property may be profitably used for the purpose for which it was intended. Stated another way, economic life is the period of time that a new property can be used before it would benefit the owner to replace it ..."
At Capitale Analytics, one logical test we use to assess remaining useful life is to ask, “How much longer is this asset likely to be relied upon as a main production asset?” After all, the fact that a machine might be used for decades as a backup machine or part-time producer is not important. Put another way, the machine is not economically useful at that point – the business owner would not have acquired the machine for that purpose – it’s just handy to keep around once it’s already paid for itself.
When appraising machinery for SBA 504 loans, we ensure that we include as much value as possible for the borrowers while still providing the diligence and common sense that the SBA needs from independent appraisers.