SBA 504 Loan Details

July 28, 2005

The SBA 504 Program gives small business owners access to competitively priced, long-term financing that large businesses have through bond markets. The 504 program also offers the borrower a lower cash down payment and repayment terms of 10 and/or 20 years.

How it Works
SBA 504 loans are administered through Certified Development Companies (CDCs) who do the majority of the work including assembling, analyzing and making recommendations on loan packages submitted to SBA, as well as closing and servicing approved loans. Typically, a 504 loan project includes:

A loan secured with a first mortgage from a private sector lender (such as Community Business Lenders) covering up to 50 percent of the cost of the eligible cost;
A loan secured with a second mortgage from a CDC (a 100 percent SBA-guaranteed debenture), covering up to 40 percent of the total cost;
A contribution of at least 10 percent from the borrower; and
The borrower’s minimum cash down payment of 10 percent is increased by 5 percent if the borrower’s business is new or if the financing is for a limited-use asset. If both factors apply, the combined increase is 10 percent.

Amount of the Loan
A CDC-financed project can be of any size, but the SBA-backed portion normally is limited to 40 percent of a project or $1 million, whichever is less. The minimum debenture is $50,000. Typical projects range in size from $500,000 to $1.5 million.

Terms
The interest rate on the first mortgage is negotiated directly with the private sector lender. The rate on the second mortgage is fixed at the time of the debenture sale. Interest rates approximate the current market rate for five- and 10-year U.S. Treasury issues, plus a small increment. Maturities of 10 and 20 years are available. Repayment is made in monthly installments.

Collateral generally consists of a junior lien on projects being financed. The private sector lender does not receive an SBA guaranty but is usually secured by a first lien on the project. The SBA is secured by a second lien (40 percent of the total cost), and if needed, additional collateral. The agency also requires personal guaranties from individuals who own 20 percent or more of the business.

Fees
Fees total approximately 3 percent of the debenture and may be financed with the loan. These include a CDC processing fee of 1.5 percent, guaranty fee, funding fee and underwriting fee.

Eligibility
To be eligible, a business must be a for-profit corporation, limited liability company, partnership or proprietorship with a net worth (including affiliates) of up to $7 million. Average net profits after taxes cannot exceed $2.5 million per year for the previous two years.

For more information on SBA loan opportunities, contact CBL at (866) 570-1237.

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