504 Loan Program information can be found here
Typical 504 Structure
- The bank provides a loan for 50% of the project costs and takes a first lien on the project assets
- CDC provides up to 40% of the project costs (up to a maximum of $5 Million) and takes a second lien on the project assets
- The business contributes at least 10% of the project costs
Terms, Rates and Fees
- The bank portion of the project typically carries a minimum 10 year maturity with a 20 or 25 year amortization. Rates and fees are negotiated between the borrower and the bank.
- The CDC portion can be either a 10 year or 20 year term (fully amortizing). The interest rate is priced monthly over the 5 or 10 year Treasury at a market driven spread plus costs. The 504 fees are financed in the 504 loan. Attorney fees in excess of $2,500 are an out of pocket cost to the borrower.
Which businesses are eligible?
Most privately held companies are eligible. The business must be:
- Small (less than $15 Million in net worth and less than $5 Million in after tax income on average for the last two years)
- A for profit firm
What can be financed with a 504 Loan?
- Acquisition/Construction of Owner Occupied Commercial Real Estate including:
- Existing Buildings
- Addition/Major Renovation
- Land/Building Construction
- Buildings on Leased Land
- Other costs that can be included in the financing package include:
- Minor amounts of FF&E
- Appraisal & Environmental
- Title & Recording Taxes
- Closing Costs, Bank Points
- Design costs
- Existing conventional mortgages can be refinanced as follows:
- In an expansion project, the lesser of 50% of the Existing Debt or 50% of the new costs can be included in the 504 project
Existing conventional mortgages and related closing costs can be refinanced through 9/30/2012. Click here for more information.
- Machinery and Equipment with a minimum 10 year expected life (i.e., printing presses or manufacturing equipment) as a standalone project or in conjunction with a building project
- Existing Building: The business must occupy at least 51%
- New Construction: The business must immediately occupy at least 60% with:
- An additional 20% expected to be occupied in 10 years
- 20% may be permanently leased out
- Typically, the down payment is 10%
- If the business has less than a 2 year operating history or is changing management, it will be considered a start-up business subject to a 15% down payment
- If the building is considered “Special Use” (i.e, a hotel, car wash, gas station, etc.) a 15% down payment is required.
- If the business is a start up and the building being financed is a special asset, the down payment required is 20%.
- The Minimum Project Size is $200,000
- There is no Maximum Project. The 504 loan is typically limited to $5 Million, but the 1st lender can lend more than 50% of the project costs. Projects could be as large as $20 Million.
- If the project is assisting a small manufacturer or certain energy efficient projects, the the 504 loan limits are $5,500,000 per project.
- Is there extra paperwork involved for a 504 loan vs. of a conventional loan?Essentially the same information any commercial lender requires is needed for a 504 loan:
- Tax returns on the business
- Projections, if start-up business
- Personal financial statement and tax returns for owners
- Brief History/description of business and owners’ resumes
- Purchase Contract or Letter of Intent, construction/renovation estimates
- How long does it take?Working with us, 10 days for our approval; 5 days for SBA approval. We have achieved certain SBA designations that allow us to process applications and closings faster.
- How do I work with a conventional lender and the CDC?The conventional lender processes its loan as it would any loan request. We work together with the bank to collect documents from the borrower, and we share our credit underwriting with the bank. When the bank closes, it uses it’s own loan documents. Appraisals and environmental reports are shared by the conventional lender and BFG.
- How does the closing process work with two lenders involved?When you acquire the property, the conventional lender will close with you and advance the full 90% financing based on our approval. This called “interim” or “bridge” financing. Once all the construction or renovation has been completed, the 504 Loan closes and the bank loan is paid down. At that point, you have two permanent loansWhen the 504 Loan closes, the bank will be asked to provide copies of its loan documents, provide copies of its draw schedules (for construction or renovation projects), certify that there has been no adverse change in the borrower’s financial condition, and agree to provide 60 days notice of default/foreclosure proceedings.
- When does my loan bond sell?A bond sale occurs once a month. Typically, if we can close your 504 Loan in the first 7-10 days of a month, your bond will sell the following month. At the time the bond is sold, your interest rate and payment amount will be set.
- I have heard of 7a loans, what is the difference between a SBA 504 loan and a SBA 7a loan?A conventional lender provides the 7a loan. Rates are typically variable, but it can have a longer term than a 504 loan. Like the 504 loan, fees are financed, but 7a fees are typically higher than 504 fees. 7a loans can be used for a variety of financing needs and are often used in conjunction with a 504 loan when a working capital component is needed along with the real estate financing.
|SBA 504||SBA 7a|
|Interest Rate||FixedInterest rates on 504 loans are set monthly at the time of funding at an increment above the current market rate for five-year and ten-year U.S. treasury issues||Variable rate adjusted quarterlyInterest rates are negotiated between the borrower and the lender subject to a mandated SBA ceiling and floor|
|Loan Structure||50% bank loan
40% CDC loan
10% borrower down payment
|Loan structure negotiable dependent on risk
10% down payment (minimum)
|Loan Fees||Fees are financed in the 504 loan and are negotiated for the 50% bank loan. BFG charges the minimum fees as established by SBA.||Fees can be financed in the 7a loan and vary with the size of the loan, an additional .25% is charged on any loan portion above $1 million|