What is the SBA?
In 1953, Congress created the U.S. Small Business Administration to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” SBA’s headquarters is located in Washington, D.C., while its business products and services are delivered with the help of field personnel and a network of private sector and non-profit partners in each U.S. state and territory.
What is the 504 Loan Program?
The SBA 504 Loan program is a powerful economic development loan program that offers small businesses another avenue for business financing, while promoting business growth, and job creation. As of February 15, 2012, the $50 Billion in 504 loans has created over 2 million jobs. This program is a proven success and win-win-win for the small business, the community and participating lenders.
The 504 Loan Program provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. 504 loans are made available through Certified Development Companies (CDCs), SBA’s community based partners for providing 504 Loans.
A Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.
There are over 260 CDCs nationwide each having a defined Area of Operations covering a specific geographic area. The area of operation for most CDCs is the state in which they are incorporated.
SBA 504 Loan Structure
504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.
An example of how a typical 504 loan is structured follows:
504 Loan Example
Total 504 projects costs for a $1,000,000 project may include the following (eligibility requirements apply to the 504 portion of the project as well as the participating lending portion):
- Building Purchase
- Furniture and Equipment
- Soft Costs
- TOTAL $1,000,000
- $500,000, 1st lien with bank and EB-5 (loan obtained from a private sector lender covering up to 50% of the total project cost)
- $400,000, 2nd lien with 504 loan, 20 year, fixed rate (loan obtained through a CDC, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost)
- $100,000, borrower contribution (contribution from the borrower of at least 10% of the total project cost/)
SBA 504 Eligibility
To be eligible for a 504 Loan, your business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies if it has a tangible net worth not more than $15 million, and an average net income of $5 million or less after federal income taxes for the preceding two years prior to application.
Loans cannot be made to businesses engaged in nonprofit, passive or speculative activities. For additional information on eligibility criteria and loan application requirements, small business and lenders are encouraged to contact a Certified Development Company in their area.
To be considered for Certified Development Company (CDC)/504 loan, applicants must meet these eligibility requirements:
- Operate as a for-profit company
- Do business (or propose to) in the United States or its possessions
- Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
- Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
- Be an eligible type of business. While the vast majority of businesses are eligible for financial assistance from the SBA, some are not. Check this list of eligible and ineligible types of businesses to see if your company qualifies.
- Under the 504 Program, Plan to use proceeds for an approved purpose. CDC/504 loan proceeds may be used for the financing of fixed assets like real estate or equipment. This list explains Eligible and Ineligible Use of Proceeds.
- Not have funds available from other sources. SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds.
- Ability to repay the loan on time from the projected operating cash flow of the business
- Good character. SBA obtains a “Statement of Personal History” from the principals of each applicant firm to determine if they have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community
- Relevant management expertise
- Feasible business plan
SBA 504 Loan Delinquency Rate
To ensure the security of the 2nd loan that is guaranteed by the federal government, the SBA strictly reviews all projects in regards to financial risk control based on cash flow (SOP 50 10 5). In the past 10 years, the SBA 504 delinquency rate dropped to 0.8%.
For more information, please visit: https://www.sba.gov/