The SBA 504 program is ideal for small businesses because it helps to bring much needed funding for business growth and refinancing. With the 504 program, the bank will finance at least 50% of the project cost, and the 504 loan will cover up to 40% of the project cost. Small businesses realize the following advantages with the 504 loan program:
Low Down Payment (as low as 10% for existing businesses)
Long maturities (10 years for equipment or 20 years real estate).
Fixed Interest Rate, typically below market (10 yrs for equipment and 20 yrs for real estate)
Qualifying Project Costs
Land acquisition and improvements
Purchase of an existing building and building improvements
New building construction
Machinery and equipment
Furniture and fixtures
Interim financing costs
Refinance of existing debt (up to 50% of total project costs can be used to refinance existing fixed asset debt)
Almost any type of business is eligible: manufacturer, distributor, retailer, etc. Start-ups as well as existing businesses are also eligible.
Businesses must be concerned with each of the following requirements to apply for a 504 loan:
If purchasing an existing building, the small business must occupy at least 51%.
If constructing a new building, the business must occupy at least 60%. When reasonable projections of growth indicate the business will need the excess space.
Each owner of 20% or more of the operating company or property owner must guaranty the loan.
Project must, according to SBA guidelines, promote economic development such as creation of jobs, ownership by minorities and women, rural development, public policy energy goals, and/or being located in a distressed area.
Business must be for-profit and must average less than $5 million in profits after taxes and have less than $15 million in tangible net worth.
There is no project maximum size under the 504 loan since there is no limit on the bank loan. (The maximum 504 loan is $5 million, $5.5 million for manufacturing loans.)
Application fee – At the time of application, a $1,000 deposit is required. If the borrower so desires, this deposit can be used to pay the CDC’s out-of-pocket expenses, incurred on behalf of an application (title fees, recording, etc.). If the loan is not approved, the $750 is returned to the applicant. If the applicant withdraws at any point after making application, the entire application fee is forfeited. Following a successful funding, any undisbursed balance is returned to the borrower.
Third Party Lender Fee – This fee is 1/2% of the third party (bank) loan and is paid by the bank to the SBA but can be passed on to the borrower.
Processing fees – The processing fees compensate each service provider in the 504 process, which includes the CDC, SBA, underwriters and fiscal agent. Processing fees are one-time only fees and are equal to approximately 2.5% of the 504 loan. Processing fees are added to the amount borrowed.
In addition to the fixed assets being purchased, personal guarantees (anyone with a 20% interest in either the operating company or real estate holding company) and/or corporate guarantees are required. Additional collateral is sometimes requested and may include personal assets and life insurance.
If the 504 assets are sold or the original borrowing entity is sold or dissolved, the 504 loan can be assumed if the assuming party meets all credit and eligibility standards of the CDC and the SBA. (A move to prepayment – substitution of collateral is another alternative available for the borrower). An assumption fee of 1% of the outstanding balance of the loan is charged to the Assuming Party.