The SBA 504 Loan Program provides
small businesses with fixed rate financing for the
purchase of long-term fixed assets. Proceeds can be
used for the purchase of land, building and equipment
as well as finance eligible closing costs.
The 504 loan, or debenture, is made in conjunction
with the borrower's local financial institution, which
provides a first mortgage for 50% of the project cost,
Capital Partners provides a second mortgage for 30
-40% of the project while the borrower provides a
10 - 20% equity injection.
The financial institution provides a minimum 10-year
term o
n the first mortgage but the terms of the loan
are negotiated with the bank. The SBA 504 loan will
be a 20-year fully amortizing loan at fixed rate of
interest.
If you have additional questions please contact
Capital Partners.
Uses
Proceeds may be used for the acquisition,
expansion or renovation of owner-occupied
commercial real estate or the purchase of equipment
with a useful life of ten years. Project
costs may also include interest on interim financing
and professional fees related to the project.
Borrower
Equity
A minimum of 10% down payment is required. If the
small business concern has been in business less than
2 years or if the project is for a special use facility,
the minimum injection is 15%. Should both of these
apply then the equity injection is increased to 20%
of the project.
Structure
The 504 loan is typically structured as follows:
- 50% Loan secured by a senior lien from a private-sector
lender
- 30% - 40% Second loan with a junior lien from
Capital Partners through the SBA
- 10 – 20% Equity from the borrower.
Loan
Amount
The 504 portion of the loan generally does not exceed
$1 million, however the loan amount can be as high
as $2 million should the loan qualify under a public
policy goal. In combination with the first mortgage,
projects in excess of $5 million can be financed
under the program. In addition, a $4 million loan
is available to small manufacturers
whose production facilities are all located in the
United States.
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Terms
and Interest Rate
Terms of 10 and 20 years are available on the 504
loan. Interest Rates on the 504 loan are set at
a fixed rate for the life of the loan at the time
the debenture is funded. The first mortgage isnegotiated
directly with the lender; however, the term must
be at least 10 years on a 20 year
debenture and 5 years on a 10 year debenture.
Collateral
Generally the project assets being financed are used
as collateral. Personal guarantees are required from
all 20% or more principal owners of the business.
Liens on the personal assets of the principals may
be required.
Fees
Fees on the 504 loan total approximately 2.67% of
the debenture. Bank fees are negotiated with the
lender. The Bank is required to pay the SBA a 1/2%
fee on the 1st mortgage amount.
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Economic
Impact and Eligibility Requirements
The project must have a positive economic impact,
generally evidenced by one job created
by every $50,000 of 504 debenture amount, or every
$100,000 in debenture amount for
manufacturing companies. Loans that meet a public
policy goal do not have to meet the job creation
requirement. To be eligible, the business generally
must be operated for profit and have
a tangible net worth of less than $7.5 million and
an average net income of less than $2.5 million,
after taxes for the preceding two years.
Benefits
to the Borrower
- Reduced down payment requirement.
- Borrower is able to reserve capital for company
growth.
- 20-year fixed rate, below market financing
on the second mortgage.
- 504 debenture is assumable to a qualified borrower.
