SBA 504 Loan Program Profile

About SBA 504

What this loan program offers:

• Lower down payment – than conventional financing
• Competitive, fixed-interest rate – know what your payment will be for 20-yrs.
• Long-term – conserves working capital; no balloon payments
• 10-20 year terms - extended terms provide lower monthly payments
• Improve collateral position to increase borrowing capacity at lower rates

Assets which can be financed:

• Existing buildings – business must occupy at least 51% of the project (may include remodeling or expansion)
• New construction – business must occupy at least 60% of project upon occupancy (must occupy 80% within ten years and can lease 20% of project on a permanent basis)
• Machinery / equipment – must have a useful life of at least ten years

Eligible Companies:

Existing businesses that meet SBA’s definition of a small business are eligible to apply for 504 loans. Start-up ventures with financially strong and/or experienced owners are also eligible.

Benefits

For a Bank

• First lien position
• 50% loan to value ratio
• Second lien is 100% guaranteed by federal government

For a Borrower

• Low down payment
• Fixed interest rate
• Long term
• Preserves working capital
• Know what your monthly payment will be for 20 years

Sample Structure

An existing business which is currently renting space, wants to expand and own its own real estate. The project totals $1,000,000 for purchase of land, construction of a building and purchase of equipment.

Project Uses:

• Land $50,000
• Construction 825,000
• Equipment 75,000
• Professional Fees 30,000
• Interim Interest 20,000
• Total Project Cost 1,000,000

Project Sources:

• Lender 50% $500,000
• SBA 40% $400,000
• Borrower 10% $100,000
• Total $1,000,000

The Process

When the bank has approved its end of the deal, the borrower works with BHCED to provide a complete application package. From date of receipt of entire package, an SBA approval can be complete in as soon as two weeks and up to four weeks.

The third party lender finances an interim or “bridge” loan on SBA’s behalf to allow for a 60-90 day closing/funding period. The SBA loan is funded through the sale of a debenture/bond on the secondary market. The interest rate on the 504 loan is set at time of SBA funding and is tied to the 10-Year Treasure Bond.

Commonly Asked Questions

Q: Is the borrower’s contribution always 10%?

A: No. The borrower’s contribution can go up by 5% in two instances. If the business is new or is under new ownership, the injection goes up to 15%. If the asset being purchased is a single use asset*, the injection goes up to 15%. If the business is both new and a single use asset, the injection goes up to 20%.

*A single use asset is defined as one that cannot be converted into another type of business without a large capital investment. Examples: hotel, gas station, funeral home.

Q: How much can I borrow?

A: Generally up to 90% of the appraised value of the property. SBA maximum limits are $1,500,000 for a typical loan; $2,000,000 is a certain program goal is met. There is no limit on the third party lender’s portion of the project.

Q: What are the fees on a 504 loan?

A: Fees equal approximately 2.65% of the 504 portion plus $2,500. All fees are financed into the loan.

Q: How does a small business qualify for the SBA 504 program?

A: Businesses must meet the basic size 504 eligibility requirements of:

• Business net worth not to exceed $7.5 million,
• Average net profit after taxes for 2 consecutive years not to exceed $2.5 million, or
• The business may qualify under 7(a) size standards (manufacturers of 500 employees or less).

Other requirements include:

• 51% owner occupancy for existing building purchase, or
• 60% owner occupancy for new construction,
• If the project is equipment only, the equipment must have a minimum 10 year economic life.

Q: What are ineligible businesses?

A: Non-profits

Speculative development

Gambling concerns

Lending institutions

Private clubs

Q: What are ineligible uses of funds?

A: Refinance

Stock Purchase

Inventory

Working Capital

Q: Is there a prepayment penalty?

A: Yes. There is a penalty to pay the loan off in the first half of the life of the loan. The penalty declines each year. A 20 year loan would have a declining penalty for 10 years. After the half-way mark, you can pay the loan off at any time without penalty.

Q: Is the loan assumable?

A: Yes, as long as the party assuming the loan qualifies under general SBA guidelines.

Q: Does the down payment have to be cash?

A: No. The down payment can come in the form of equity in project real estate.

Q: How do I get a SBA 504 loan?

A: Contact your local lending institution or Fran White at Black Hills Community Economic Development, at 605-381-2591 or fwhite@tie.net.