Frequently Asked Questions about
the SBA 504 Loan Program
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What businesses are eligible for a SBA 504 loan?
Security Bank 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 $6 million and does not have an average net income in excess of $2 million, after
taxes for the preceding two years. Loans cannot be made to businesses engaged in
speculation or investment. |
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How does the SBA 504 loan program work?
The 504 program is designed to enable small businesses to create and retain jobs.
Typically, a 504 project includes the following:
- A loan secured with a senior lien from a private-sector lender (bank) covering up
to 65 percent of the project cost,
- A second loan with a junior lien from a (certified development company) covering
up to 40 percent of the 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%).
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What is the maximum loan amount?
The maximum loan amount for the 504 portion of the loan is generally $1 million
(in some cases up to $1.3 million if the borrower is a minority or if the business
is located in a rural county). No maximum on project size but generally does
not exceed $4.5 million.
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What expenses will a SBA 504 loan cover?
Proceeds from 504 loans must be used for fixed asset projects 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 or inventory, consolidating or
repaying debt, or refinancing.
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What term and interest rate can I expect?
First Mortgage rates are negotiated with lending instituion. Maturities of
10 and 20 years are available. Interest rates on 504 loans are set at a fixed rate
at the time the loan is funded. Rates are based on a spread above the treasury bond
rate and are generally very competitive Market rates. |
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What fees are involved with an SBA 504 loan?
Fees total approximately 3 percent of the debenture and may be 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.
Interest rates and fees on the first mortgage are negotiated directly with the lender.
The bank holding the first mortgage must pay a 1/2% fee to the SBA.
Generally the project assets being financed are used as collateral. Personal guaranties
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.
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What does the SBA look for in a loan applicant?
- Good Character
- Management expertise and commitment necessary for success.
- 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)
- Feasible business plan Adequate equity of investment in the business
- Sufficient collateral
- Ability to repay the loan on time from the historical or projected operating cash
flow
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When it comes time for the first meeting with a lender, what should a business owner
bring?
When meeting with a lender a borrower should have an idea of how much financing
they need, how the money will be spent, how much equity they can put into the project,
and what kind of collateral they can provide for the loan. They should be prepared
to tell the lender about their business, how this request will benefit their company,
and how they will repay the debt.
The SBA will require the same type of financial information required for a conventional
loan. A checklist is available.
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What government paperwork or forms will eventually be needed?
Security Bank will prepare the SBA loan application and any other forms to be submitted
to the SBA. There is no packaging fee or charge for this service.
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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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How long does it take to get a SBA 504 loan?
Once a borrower has submitted a complete loan package to Security Bank, an approval
can be obtained from Security Bank and the SBA within about 3 - 4 weeks.
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