What is the SBA 504 Program?
The SBA 504 loan program provides funding for small businesses to cover costs associated with fixed assets, usually Real Estate. For businesses that qualify, this government-guaranteed program provides up to $5 million in SBA-backed financing ($5.5 million for qualifying manufacturers and energy projects).
Qualifying and use of funds
Who can qualify?
- Most for-profit, owner-occupied small businesses in the U.S.
- Tangible net worth of less than $20 million
- Average net income of less than $6.5 million after federal income taxes for the two years preceding the application (including affiliates)
- Manufacturers with 500 or less employees (including affiliates)
- 100% of owners and all required guarantors must be U.S. citizens or U.S. nationals with a principal residence in the U.S., its territories or possessions
Eligible use of funds
- Land
- Acquisition of Existing Building
- New Construction
- Building Expansion/Renovation
- Large Cost Long-Term Equipment
- Real Estate Debt Refinance (qualified debt only)
Ineligible use of funds
- Working Capital
- Inventory
- Goodwill Assets from Business Acquisition
- Franchise Fees
- Improvements for third-party tenants
Borrower’s injection and terms
Borrower’s injection
- 10% in most cases
- 15% for Start-Up Businesses (less than two years in operation) or Special-Purpose Properties
- 20% if the project is both a Start-Up and Special-Purpose Property
- Equipment-Only loans may qualify with 10% or 15% injections
Interest rate and terms
- Fixed-Rate – based on Treasury Rates
- Fully-Amortized over life of loan (No Balloon)
- Real Estate – may be 10, 20 or 25-year term
- Machinery & Equipment – may be 10 or 20-year term (based on useful life)
- Rate “locks-in” when the SBA funds the debenture
- Pre-Payment Penalty – 20/25 Year Loan – 10 Year Pre Pay, 10 Year Loan – 5 year Pre Pay
Benefits and occupancy
Benefits for borrowers
- Finance up to 40% of the project at a long term, fixed-rate
- Lower equity contribution, as little as 10% of project to preserve working capital
- Decreased risk for lenders
- Eligible soft costs may be rolled into the project financing
- For Expansion Projects – provides debt refinancing opportunity
Occupancy
- 51% for existing facilities/buildings (renovations and expansions are eligible)
- 60% for Ground-Up Construction Projects (must occupy 80% within ten years)
Sample projects financed by 504
- Office Buildings & Commercial Condos
- Dentists
- Convenience Stores & Retail
- Printing/Copying
- Franchises
- Suppliers/Wholesalers
- Child/Adult/Pet Daycare
- Manufacturers
- Hotels/Motels
- Medical Facilities
- Animal Hospitals
- Heavy Machinery & Equipment
Frequently asked questions
What is the SBA 504 loan program used for?
Loans obtained through the SBA 504 program are typically used to pay for capital investments in tangible assets and infrastructure. Land and buildings are among the most common items these loans are used to pay for; equipment used in warehouses and machines used during manufacturing are also qualifying expenses in most cases, though. The purpose of these loans is to help start-ups and growing companies that would otherwise not be able to afford these necessary assets by providing fix-rate, long-term loans that can be paid back over time. These assets also act as the collateral used to secure the loan.
What is the amount of an SBA 504 loan?
The SBA-backed (CDC) portion of a 504 loan is generally capped at $5 million per project, or $5.5 million for small manufacturers and qualifying energy public policy projects. The cap applies to that portion, not the total project cost.
Projects must also create or retain one job for every $95,000 of the SBA-guaranteed debenture ($150,000 for small manufacturers and energy projects), or meet an SBA public policy goal instead.
The funding for these loans usually comes from three sources. The business is expected to front 10 percent of the loans total. Private financial institutions provide 50 percent, and a government-approved Certified Development Company (CDC) makes the remaining 40 percent available.
What is the SBA 504 loan program application process?
The application process for an SBA 504 loan involves many forms, as one might expect a government-backed loan to. One of the first forms that must be filled out is the SBA Application for Business Loan. The SBA will also ask for a Personal Financial Statement early on in the application process.
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Paul is NOT a loan broker but works for a financial institution that is a direct lender.