It is important to realize the SBA does not loan money. A traditional lender, such as a bank, loans the money. The SBA then guarantees a portion of the loan, between 30%-90% depending on the loan type. This is similar to being a loan co-signer.
For example, every SBA 504 Loan is made in partnership with a Certified Development Corporation (CDC), the SBA, and a lender. The lender provides up to 50% of the financing. Community Business Finance provides up to 40% of the financing, while the borrower's contribution can be as low as 10%. Community Business Finance provides funding via the sale of a 10-year or 20-year federally insured bond that is sold to private investors. These bonds are backed by the SBA and fully guaranteed by the U.S. Treasury.
504 Loans are fixed-rate low interest loans repaid long term (20 years) with as little as 10% down. Review the Program Benefits in our 504 School for more detailed information.
A bank or other lender contributes 50% of the total project cost, Community Business Finance contributes 40% which is backed by the SBA, and the borrower contributes a 10% down payment. This means there are two loans.
Straight purchases, such as heavy equipment or existing buildings, usually require 60 to 90 days to fund. With new building construction, the loan funds after construction is complete.
You may be surprised to learn that most businesses qualify for 504 Loans. Your business must be for profit and be based in the US, have a net worth under $15 million, and net profits under $5 million (2-year average).
A more detailed explanation is found in See if Your Business Qualifies in our 504 School.
504 Loans can be used to finance heavy equipment and machinery, real estate, building renovations, and new construction. For more detailed information, please review Eligible Use of Funds in our 504 School.
These assets must have a useful life of at least 10 years and be at a fixed location. Furniture, fixtures and equipment with a useful life of less than 10 years can be included in mixed use projects where these are essential to and a minor part of the total project cost.
Yes! Soft costs and closing costs can be financed in the 504 Loan, which preserves working capital. Examples of these costs include title insurance fees, architect fees, engineering fees, any required environmental studies, the cost of a project appraisal, and the cost of any survey required to provide clear title.
There is a declining prepayment penalty for the first 10 years of the loan, based on the loan amount and the funding rate.
504 Loans can finance up to 40% of the total project cost for no more than $5 million. For manufacturing businesses, the maximum is $5.5 million.
Your capital injection can come from your own savings, home equity, or monies given to you by a friend or family member that you don't have to repay. You cannot finance your capital requirement through other sources (for example, credit cards or another lending source). At least half of your contribution must come from your own sources, such as savings. You can also borrow against your retirement accounts, which represent personal equity.
Yes! As long as you have receipts for purchases made and proof of payment, funds already spent in the start up of your business can be applied toward your capital requirement.
If equity is borrowed and secured by another asset, you must demonstrate that repayment of that loan comes from sources other than the cash flow of the business (salary of the owner does not qualify).
Every SBA lender is its own entity, and lends differently depending on its own appetite for risk, experience and timing. Some lenders are more flexible than others. Lenders want to make loans to businesses they believe have the capacity to service the debt, and do not want to have to go to the SBA for repayment. Therefore, considerable scrutiny is still exercised in the approval process.
If you are a start-up business, you will need a business plan. If you are an existing business in operation for more than two years, you will need to compile a summary of the history and nature of your business, and how expansion will positively affect your revenue. Review How to Create a Business Plan in our 504 School.
You will need all the application forms completed, personal and business tax returns for the last three years, financial statements on the business for the last three years. Start-ups will need a business plan, projections, and assumptions on which the projections are based. You can review a more detailed list in What You Need in our 504 School.
The good news is there is less paperwork than you might think. Any loan requires a standard application with supporting documentation. Community Business Finance will walk you through the process and handle all communications with the SBA for you.
Small Business Development Centers are a great resource. SBDCs are hosted by leading universities and colleges in partnership with the Small Business Administration. Their mission is to aid entrepreneurs in becoming business owners and help existing businesses remain competitive. Consulting services are free of charge and training services cost very little.
For SBDCs near the Houston area check out the University of Houston, Sam Houston State University, Lone Star College, and San Jacinto College.
Community Business Finance will work with any bank or non-bank lender and will handle all of the SBA paperwork for them. Any borrower can call our office directly to receive an application and/or a referral to a lender familiar with the 504 Loan process.