SBA 504 Loans for Small Business

An SBA 504 loan is designed to finance long-term fixed assets like commercial real estate and equipment.

You can use an 504 loan to purchase and renovate an existing building, buy land and finance ground-up construction, purchase new equipment, or pay off debt incurred from these purchases.

SBA 504 loans are structured differently than other SBA loan programs and it’s important to understand that 504 loans are composed of three distinct parts—the lender, Certified Development Company (CDC) and a borrower. In most cases, SBA 504 loans are structured in a 50-40-10 model. First is the bank loan, which is 50% of the total amount. Second is a Certified Development Company (CDC) who provides 40% of the total loan amount. And third is the borrower who provides a 10% down payment. New businesses that have been in operation for less than two years, as well as special purpose properties, are required to provide an equity amount of 15%, creating a 50-35-15 structure. If you are both a new business AND a special purpose property, the borrower’s equity requirements change to 20%, following a 50-30-20 model.

Example:

Robert is a small business owner who needs $1,000,000 to renovate his current building, as well as upgrade some heavy machinery for his business. His lender provides $500,000 for the first loan, while a CDC provides $400,000 through an SBA-guaranteed debenture and finally, Robert is responsible for the remaining $100,000 as a down payment. Robert will make payments on his 504 loan directly to his lender.

While the eligibility requirements for a 504 loan are nearly the same as for the SBA 7(a) loan program, the approved uses of the loan are different. They fall into three main categories: buying commercial real estate, financing improvements within that real estate and purchasing large equipment. The maximum loan amount can be up to $15 million with maturity rates up to 25 years and low, multi-year fixed interest rates.

Purchasing commercial real estate for your business to occupy so you can improve your cash flow and help build additional equity over time as you take advantage of appreciating property values.

Some typical uses include:

• Purchase undeveloped property
• Finance ground-up construction
• Buy and upgrade existing non-specialized buildings
• Purchase equipment with a service life of 10+ years
• Refinance conventional debt

Hundreds of industries qualify for SBA 504 financing. Here are some examples:

• Assisted Living and Skilled Nursing Facilities
• Restaurants
• Gas Station/Convenience Store
• Childcare/Daycare
• Hotel/Motel
• Self Storage
• Commercial Solar

To be eligible for a 504 loan, your business must:

• Operate as a for-profit company in the United States or its possessions
• Have a tangible net worth of less than $15 million
• Have an average net income of less than $5 million after federal income taxes for the two years preceding your application

Other general eligibility standards include  falling within SBA size guidelines, having qualified management expertise, a feasible business plan, good character and the ability to repay the loan.

Loans cannot be made to businesses engaged in nonprofit, passive, or speculative activities.

• Up to $15,000,000
• Up to 90% loan-to-value
• Up to 25 years, fully amortizing
• Loan amount can include additional funds for working capital, property improvements, or other business needs
• No financial covenants
• No balloon payments

• While the rates are better than SBA  7(a) loans the turnaround time is longer

Ensure you have a good credit score of 680+ and your cash flow is consistent especially over the past 90 days

Be prepared to discuss in detail the purpose of the funds as we will have to create a sufficiently compelling executive summary

For business acquisitions, we’ll need to provide the following:

• Last THREE years of Personal Tax Returns from the prospective buyer of the business
• Personal Financial Statement from the prospective buyer of the business
• Borrower Resume
• Last THREE years of Business Tax Returns from the business being purchased
• Year-To-Date Financial Statement (balance sheet and P&L) less than 60 days old from the business being purchased
• The letter of intent and/or purchase contract for the business acquisition OR an Executive Summary highlighting the total project costs of the business acquisition project being requested.

Do not be discouraged. We have other loan products that are more costly, but the turnaround time is significantly faster. Check out our home page for other lending products that might meet your needs or give us a call an we’ll offer some suggestions.