1. What businesses are eligible for
a SBA 504 loan?
Capital Partners through the U.S. Small Business Administration
(SBA) provides financing for a wide range of businesses.
To be eligible, the business generally must be operated
for profit and fall within the size standards set
by the SBA. Under the 504 program, a business qualifies
as small if it does not have a tangible net worth
in excess of $7 million and does not have an average
net income in excess of $2.5 million, after taxes
for the preceding two years. Loans cannot be made
to businesses engaged in speculation or investment.
2. How does the SBA 504 loan program
work?
The 504 program is designed to enable small businesses
to create and retain jobs. One job must be created
or retained for every $50,000 of 504 loan proceeds.
Typically, a 504 project includes the following:
• A loan secured with a senior lien from a private-sector
lender (bank) covering up to 50 percent of the project
cost,
• A second loan with a junior lien from Capital
Partners (Certified Development Company) covering
up to 40 percent of the project cost,
• A contribution of at least 10 percent equity
by the borrower, with loans for start-up companies
or for special purpose buildings requiring an additional
5% (a combination of start-up and special purpose
would require an additional 10%).
3. What is the maximum loan amount?
The maximum loan amount for the 504 portion of the
loan is generally $1.5million, in some cases up
to $2.0 million may be loaned when the borrower is
a minority (including women), if the business is
located in a rural county or if the loan meets some
other public policy goal.
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4. What expenses will a SBA 504 loan
cover?
Proceeds from 504 loans must be used for the acquisition
of fixed assets such as:
• Purchasing land and improvements, including
existing buildings, grading, street improvements,
utilities, parking lots, and landscaping.
• Constructing, modernizing, renovating or converting
existing facilities.
• Purchasing machinery and equipment.
• Interest on interim loans, professional fees,
and soft costs related to the project.
The 504 program cannot be used for working capital,
inventory purchases, debt consolidation or refinancing.
5. What will the term and interest
rate be on the 504 loan?
Terms of 10 and 20 years are available. The 504 debentures
are sold on the secondary market and interest rates
are set at a fixed rate at the time the loan is funded.
6. What
fees are involved?
Fees total approximately 2.85 percent
of the debenture
and are financed with the loan. This fee includes
a CDC processing fee of 1.5 percent; a guaranty
fee, a funding fee, and an underwriting fee. The
bank is required to pay to the SBA a 1/2% fee on
the 1st lien loan amount.
Interest rates and fees on the first mortgage are
negotiated directly with the lender.
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7. Are
there any pre-payment penalties?
There is a pre-payment penalty on the 504 loan based
on a sliding scale for the first 10 years on 20 year
debenture and the first 5 years on a 10 year debenture.
Terms on the first mortgage are negotiated directly
with the lender.
8. What type of collateral is expected
to be pledged?
Generally the project assets being financed are used
as collateral. Personal guarantees are required
from all principal owners of the business (with ownership
of 20% or more). Liens on personal assets of the
principals may also be required.
9. What
does the SBA look for in a loan applicant?
• Good character, management expertise, and
the commitment necessary for success.
• Adequate equity investment in the business
and sufficient funds to operate the business on a
sound financial basis (for new businesses, this includes
the resources to withstand start-up expenses and the
initial operating phase).
• Ability to repay the loan on time from the
historical or projected operating cash flow.
• Feasible business plan.
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10.
What government paperwork or forms will eventually
be needed?
Capital Partners will prepare the SBA loan application
and any other forms to be submitted to the SBA.
There is NO packaging fee.
11. Is a business more apt to qualify
for a SBA loan rather than a conventional loan? What
is the difference?
The purpose of a SBA loan is to provide financing
for small businesses that are unable to obtain conventional
financing appropriate for the business. The SBA is
able to provide longer terms, which are often not
available on a conventional loan. A borrower may need
these terms in order to have sufficient cash flow
to pay for the proposed loan payments. Another reason
why a borrower may not qualify for conventional financing
is because the bank may consider the business to be
in an industry which is "too risky", such
as start-up companies or restaurants.
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