| Q: What is a SBA 504 Loan? |
| A: The United States Small Business Administration enables growing businesses to secure long-term, fixed-rate financing for assets through the 504 Program. The program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, such as land, buildings, machinery and equipment. The assets must be used principally to enable the business to create or retain jobs or to satisfy community or public policy goals. The 504 Program gives small business owners access to the same low-cost, fixed-rate, long-term financing that large businesses have through the bond markets. |
| Q: What is a CDC? |
| A: A Certified Development Company finances business expansion through the SBA 504 loan program. Certified by the SBA, they operate under the jurisdiction of a board which includes local government officials, private sector lending institutions, and business and community organizations. The CDC's professional staff works directly with you to tailor a financing package that meets program guidelines and the credit capacity of your business. Currently, there are more than 270 CDCs throughout the United States. |
| Q: What are the loan amounts available? |
| A: A CDC financed project can be of any size, but the SBA backed portion of the loan package is usually limited to 40% or $1,000,000 whichever is less. However, when certain community or public policy goals are met, the SBA backed portion can go up to $1,300,000. The minimum debenture is $50,000 with typical projects ranging in size from $125,000 to $5 million. |
| Q: Who is Eligible? |
| A: Independently-owned, for-profit businesses that meet 504 project requirements are eligible. In most cases, these are businesses which are ready to expand by purchasing fixed assets ranging from $125,000 to several million dollars. Net worth must be $7 million or less and average net profits after taxes cannot exceed $2.5 million per year for the previous two years. |
| Q: What are the terms? |
| A: With the 504 loan, you get a fixed rate of interest and terms of 20 or 10 years for real estate and 10 years for equipment, with level debt payments. Interest rates are approximately one point over the current five and 10 year US Treasury issues. |
| Q: What are the advantages for financial institutions? |
| A: The financial institution has first lien position with a low loan-to-value, minimizing the collateral risk and they get to set their own rate and fees. |
| Q: Is a 504 project eligible that results from a change of ownership? |
| A: Yes, under the following circumstances: The 504 project finances only the acquisition of eligible long-term fixed assets; the acquisition of any other assets such as receivables or goodwill have to be financed by other means such as the 7(a) program; and if the change of ownership includes a stipulation that jobs are going to be retained because of the change of ownership, there has to be a reasonable assurance that the jobs would be lost without the change of ownership. This can be in the form of a statement from the seller to that effect, or some other certification acceptable to the SBA field office. |
| Q: Can 504 loan proceeds be used to purchase stock? |
| A: Normally no. If the corporation has assets in addition to long-term fixed assets, 504 loan proceeds must not be used to purchase the stock. Instead the 504 loan proceeds can be used to purchase the fixed assets from the corporation. Other financing (such as 7(a) guaranty loans) can be used to purchase the stock of the company. (This may require revaluation of the stock.) The exception would be the rare instance when the corporation's assets are only the eligible long-term fixed assets in which case the purchase of the long-fixed assets. |
| Q: Can a 504 project involve more than one site? |
A: This is a credit decision that must be carefully made on a case-by-case basis. Generally, it is SBA's policy that one 504 debenture should finance one site. The reason a borrower may want a 504 project to finance more than one site is that it is less costly for the borrower in terms of closing costs; however, there is the added risk that if one 504 debenture financed two or more sites, and one of those sites fails while the other does not, the failure of the one could result in both failing through foreclosure. If these credit concerns can be offset, then financing more than one site may be feasible.
In such projects, the CD should obtain an agreement from any prior lienholder on the project to the effect that the prior lienholder will claim priority in the proceeds of the sale or other return on the real estate over the interest of SBA only in the principal amount outstanding of the apportioned share that collateral represents to the whole project together with the same proportion of the accrued but unpaid interest remaining on it and its expenses directly related to realizing on this collateral.
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| Q: Can the 504 program provide start-up financing? |
| A: In some cases, yes. The SBA 504 is for strong, growing businesses that are purchasing real estate as part of their expansion plans. However, there are exceptions: 1) when an established company is expanding by opening another facility in a new location, such as a restaurant which decides to open up another outlet in a nearby city, or 2) when an established company branches out into a related field, such as manufacturer of carpets who purchases a new facility to expand into other flooring products. In each of these cases additional equity would be required in order to offset the risk which is inherently involved in any start-up. |
| Q: Is there a pre-payment penalty for the SBA 504? |
| A: Yes, there is a pre-payment penalty for the first 10 years of a 20-year SBA 504 loan and for the first 5 years of a 10-year SBA 504 loan. The penalty is calculated as a percentage of the outstanding value of the loan and decreases each year. |
| Q: Does SBA 504 allow debt refinancing? |
| A: No. Debt refinancing is prohibited under the SBA 504 loan program. |
| Q: What's the difference between the SBA 504 and the SBA 7a loan? |
A: There are several differences in what the loans can be used for and the source of loan funds. First, a SBA 504 is for land and building construction or acquisition, for improvements to the building for the operating company, or for machinery and equipment. The SBA 7a can be used for real estate and M & E, as well as working capital, lines of credit, and, in some cases, refinancing. The 7A interest rate is tied to the prime rate and is typically variable. The 504 loan is tied to the treasury market and is fixed for the life of the loan. Usually, the project size for a 504 loan can be as high as $5,000,000 while the guarantee portion of a 7A is limited to $1,000,000.
The SBA 7a is a SBA guarantee of a portion of a bank or non-depository institution loan. SBA 504 loans are funded through the sale of government guaranteed debentures. The SBA 504 is a second mortgage loan, typically junior to a first mortgage, conventional, bank loan. To obtain a SBA 7a loan, a borrower works with a bank or non-depository institution. To obtain a SBA 504 loan, a borrower works with a Certified Development Corporation who work very closely with the participating bank in each 504 transaction to facilitate a smooth approval and funding process for the borrower.
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| Q: Can Enterprise Funding Corporation help me get through the loan process? |
| A: Absolutely! Our staff of experts can work with you step by step through the loan process. |
| Q: How long does the process take? |
| A: We can prequalify you within 48 hours. It depends on the type and complexity of the loan. EF can work with you to complete the pieces necessary to finalize the loan. This process can take as little as three weeks to get final SBA approval from the date we have a complete loan package. |
| Q: How do I know if I qualify for a particular loan? |
| A: Call us! We'll work with you on the initial intake to go over your needs in relation to the type of loan that would be applicable to you. |
| Q: What kind of help can I get after I get the loan? |
| A: EF has a dedicated staff that can help you in your business. We are committed to helping you become or stay successful. We are available to you before, during, and after the process. Do I need a business plan for my start-up business? Yes, every business should have a business plan. A business plan is required by any business lender. It is so important to your success that we have included a business plan outline on this web-site. EF can also help you complete your business plan. Click here to view the business plan. |
| Q: Can I borrow all of my project needs from the SBA 504 Loan Program? |
| A: Yes, you can also include soft costs that are not usually part of conventional commercial mortgage loans available from banks or financial institutions? Should end with a period not a question mark |
| Q: My banker said my business' cash flow can support the expansion project, but I don't have the 25% percent equity to make the deal work, how can the 504 Loan Program help? |
| A: The equity can be cash, borrowed or a gift to the business. In some cases, where you already own the building and want to remodel or expand it, the equity in the building can satisfy the program's equity requirement. |
| Q: What if I do not have a bank contact? |
| A: EF can introduce to any number of bankers or other commercial lenders who have a proven track record using the SBA 504 Loan Program. EF can make sure you establish a relationship with someone who can meet your project and business banking needs. Are there any 504 fees? Yes, there are fees. The 504 Loan program allows you to finance the fees so you can save cash for your business' operating needs. EFC's fees are the lowest in the industry. |
| Q: Is it true an SBA 504 loan requires a lot of paperwork and that it takes a long time to get approval for an SBA 504 loan? |
| A: Those days are long gone. First, the SBA has streamlined the Program. The SBA 504 application requirements closely resemble your bank's application requirements. Second, and more importantly, our SBA 504 Lenders have decades of experience using SBA programs. They will assist you every step of the way to insure that the SBA 504 approval is in place when you need it. Will using the SBA 504 Loan Program delay the closing of the purchase of real estate or machinery and equipment? Once your SBA 504 loan is approved in writing by the SBA the lender participating in the project may fully fund the purchase of the real estate and/or machinery and equipment. |
| Q: Can 504 loan proceds be used to purchase stock? |
| A: Normally no. If the corporation has assets in addition to long-term fixed assets, 504 loan proceeds must not be used to purchase the stock. Instead the 504 loan proceeds can be used to purchase the fixed assets from the corporation. Other financing (such as 7(a) guaranty loans) can be used to purchase the stock of the company. (This may require revaluation of the stock.) The exception would be the rare instance when the corporation's assets are only the eligible long-term fixed assets in which case the purchase of the stock is the purchase of the long-term fixed assets. |
| Q: Is an applicant with personal liquidity disqualified from receiving funds through the 504 program? |
A: A three level system based on the size of the TOTAL financing package is now used to calculate when liquid assets must be used by the borrower to reduce the SBA portion of the package. Liquid assets include: cash, savings accounts, CD's, marketable securities, and cash surrender value of life insurance. Assets which are NOT considered liquid include: real estate, closely-held non marketable stocks, IRA's, 401(K) or Keough plans or other retirement accounts not established within 120 days of the SBA application. The SBA requires personal resources to be injected into the total financing package when the owner's liquid assets exceed the amounts below:
Total Financing Package personal liquid assets that must be injected into the project:
For projects of $250,000 or less: The greater of 2X the total financing package or $100,000
For projects of $250,000-$500,000: The greater of 1.5X the total financing package or $500,000
For projects of $500,000 or more: The greater of 1X the total financing package or $750,000 |
| Q: Is the applicant automatically ineligible if they have had a bankruptcy? |
| A: NO…If the bankruptcy was not recent and there is a satisfactory explanation for it, the applicant may be eligible for a 504 loan. |
| Q: Can seller subordinated financing be used as the equity portion of the project? |
| A: Yes, however, in addition to subordinating to the bank and the SBA, the seller will be required to sign a Standy Agreement disallowing principle payments on the loan. If the applicant has made several years of prompt payments on the SBA loan, and the cash flow and financial condition of the borrower support it, a request to the SBA to begin allowing principle payments to the seller might be approved. |
| Q: Are there tax advantages to me if I own the real estate personally and lease it back to my company? |
| A: Most accountants say yes. However, anyone who owns 20 percent or more of either the real estate to be leased back or the operating company will be required to sign a guarantee for the entire SBA loan. |
| Q: If a service station/food store sells lottery tickets, are they eligible due to gambling restrictions? |
| A: As long as the gambling revenues represent less than 30 percent of the total revenues, the business is eligible for an SBA loan. |
| Q: Can I contribute land that I purchased previously to my building construction project as equity? |
| A: Land may be used as the equity injection in the project. The appraised value may be used if the land was acquired more than two years prior to the application date and the appraisal is accompanied by a title report covering the sale history for the past five years. Otherwise the lower of the cost or market value must be used. |
| Q: Is the SBA 504 portion of the loan assumable? |
| A: Yes, as long as the SBA has an opportunity to review both the corporate and personal financial information on the proposed borrower(s) in advance of the sale. The loan assumption fee is 1% of the principle amount of the loan balance. NOTE: The release of the original borrower's Personal Guarantee is NOT automatic with a loan assumption. Is it possible to purchase both real estate and equipment at the same time using an SBA 504 loan? Yes- in two possible ways. It is possible to prepare companion 504 loans -one twenty year real estate loan, and another ten year loan for equipment. Or, if the weighted useful life of the equipment does not drag the over-all life of the project below twenty years, we can prepare a single application which includes both real estate and equipment. |
