Purpose of the SBA 504 Loan Program
The SBA 504 loan program was established by the U.S. Small Business Administration (SBA) to assist existing small businesses to expand through acquisition, remodeling and rehabilitation of real property through low-cost, long-term, fixed-asset financing.
What are the advantages of this program?
Low down payment (usually 10%) - Frees up cash flow
Reduced interest rates
Fixed interest rate - Unusual with commercial loans
Longer terms than conventional loans
Potential tax advantages to principals
Who qualifies for the 504?
Healthy, for-profit corporations, partnerships, limited liability companies, or proprietorships which have either a net worth of under $7 million or a two year average net income, after federal income taxes, of less than $2.5 million.
Businesses that can meet SBA requirements of creating one new job within two years for each $50,000 of the funds provided by the SBA portion of the loan. (Waived if certain Public Policy Goals are met.)
Companies whose existing cash flow is sufficient to cover projected debt service.
How may funds be used?
1. Land acquisition and construction of a building.
2. Purchase of existing land, buildings and improvements.
3. Expansion, renovation, and restoration of real property.
4. Purchase of equipment which has a minimum 10-year life expectancy.
What are the Costs?
1. There is a 2.65% origination fee on the 504 debenture portion. These
points will be included in, and financed over the life of the SBA loan.2. Nominal attorney's costs for closing the loan
3. Cost of a Title Insurance policy.
Terms of the loan
The 504 loan is the lesser of 40% of the project cost or $1,000,000 ($1.3 million under certain conditions). The 504 loan has a term of either 10 or 20 years. The interest rate is determined by the long-term Treasury borrowing rate and is fixed and fully amortized over the term of the loan.
The bank loan must have a term of at least ten years in conjunction with the SBA 20 year loan or 7 years with the SBA 10 year loan. It generally has a negotiable rate of interest and normal bank fees. The loan is a conventional first trust deed real estate loan.
For projects involving construction, the bank making the long-term loan normally provides interim financing. 504 funds can only be used as takeout financing upon completion of the project.
NOTICE
IMPORTANT INFORMATION ABOUT IDENTIFICATION
PROCEDURES WHEN OBTAINING A 504 LOAN
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all Certified Development Companies to obtain, verify, and record information that identifies each person who applies for a 504 Loan.
What this means for you: When you apply for a 504 Loan, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents.
