It is important to note that 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% and 90% - depending on the loan type. This is similar to co-signing a loan.
For example, every SBA 504 loan is made in partnership with a certified development company (CDC), the SBA, and a lender. The lender provides up to 50% of the financing. Community Business Finance provides up to 40%, and the borrower's contribution can be as low as 10%. Community Business Finance provides funding via the sale of a 10-, 20-, or 25-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.
What are the main advantages of a 504 loan?
504 loans are fixed-rate low-interest loans repaid long term (10, 20, or 25 years) for as little as 10% down. Review the Program Benefits section in our 504 School for more detailed information.
How is a 504 loan structured?
A bank or other lender contributes 50% of the total project cost, and Community Business Finance contributes up to 40%, which is backed by the SBA. The borrower contributes a 10 to 20% down payment. This means there are two loans.
How long does it take to get a 504 loan?
Straight purchases, such as heavy equipment or existing buildings, usually require 60 to 90 days to fund. For the construction of the new buildings, the loan provides funding after construction is complete.
Does my business qualify for a 504 loan?
You may be surprised to learn that most businesses qualify for 504 loans. Your business must be for-profit and based in the U.S. and have a net worth under $15 million and net profit under $5 million (2-year average).
A more detailed explanation is found in See if Your Business Qualifies in our 504 School.
How can I use 504 loan proceeds?
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 Uses of Funds in our 504 School.
What kind of equipment can be financed with a 504 loan?
The 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 fewer than 10 years can be included in mixed-use projects if they are essential but a minor part of the total project cost.
Can other costs be included in a 504 loan?
Yes! Soft costs and closing costs can be financed in a 504 loan, which preserves working capital. Examples of these costs are 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 a clear title.
Are there prepayment penalties?
There is a declining prepayment penalty for the first 10 years of the loan, based on the loan amount and funding rate.
What is the maximum loan amount?
504 loans can finance up to $5 million per project. For manufacturing businesses and companies that meet green energy policy goals, the maximum loan is $5.5 million. The second lien 504 loan can be part of a total project of up to $15 million.
Where can my capital injection/down payment come from?
Your capital injection can come from your own savings, home equity, or monies gifted to you by a friend or family member that you do not have to repay. You cannot finance your capital requirement through other sources such as a credit card 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, as they represent personal equity.
Can items already purchased be counted as my capital injection/down payment?
Yes! As long as you have the receipts for purchases made and proof of payment, the funds already spent in the start-up of your business can be applied toward your capital requirement.
Can home equity lines of credit be used for my capital injection/down payment?
If equity is borrowed and secured by another asset, you must demonstrate the repayment of that loan will come from sources other than the cash flow of the business (the salary of the owner does not qualify).
If the SBA is guaranteeing the loan, shouldn't I automatically be approved by the first lien lender and the SBA?
No, that is not possible.
Every first lien lender lends differently depending on its own risk appetite and experience. Some lenders are more flexible than others. Lenders want to make loans to businesses they believe have the capacity to service the debt, and they do not want to service loans in distress or default. Nor do they want to force foreclosure and liquidation if the loan fails. Therefore, considerable scrutiny is exercised in their approval processes.
The CDC and the SBA must also approve the application for the second lien note. Both must certify that the business is eligible for the 504 Loan Program, and both must believe the applicant is creditworthy especially since the SBA is in a junior lien position, behind the first lien lender. The CDC and the SBA are stewards of the U.S. taxpayers’ funds. As such, both are commissioned to act prudently to maximize economic development and minimize losses.
Do I need a business plan?
If you are starting a new business or if your company has been operating for less than 24 months, you will need a detailed business plan. If you are an established business in operation for at least two years, you will need to prepare an executive summary of your business. Review the How To Create a Business Plan in our 504 School for more guidance.
What documentation do I need when I submit my loan application?
You must complete all the application forms and provide your personal and business tax returns for the last three years as well as the financial statements of the business for the last three years. Start-ups will need a business plan, projections, and the assumptions on which the projections are based. You can review a more detailed list in What You Need in our 504 School.
How much paperwork is involved?
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.
If I need some type of business consulting, where can I go?
Your local Small Business Development Center (SBDC) is 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. The consulting services are free of charge, and the training services cost very little.
For SBDCs near the Houston area check out the University of Houston, Sam Houston State University, and San Jacinto College.
What if my bank does not want to do a 504 loan?
Community Business Finance will work with any bank or non-bank lender and handle all of the SBA paperwork for them. Any borrower can call our office directly to get a referral to a lender familiar with the 504 loan process.
When do I need financial projections?
All business plans need financial projections with detailed assumptions. Any established business that is financing an additional location or significantly renovating its current facility will also require financial projections with detailed assumptions.