The SBA 504
Loan Program
A “Win-Win” for the bank
and the small business!
What is the SBA 504 Loan Program?
It is the Small Business Administration’s
“economic development financing program”
 Loans are provided to expanding small
businesses to aid in job creation
 SBA loans are guaranteed by the Federal
Government
2
Selling the 504 Option

If the answer to any of the following questions
is yes, then give the customer an introduction to
SBA 504.

Is working capital important to the success of the
business?
 Is a long term fixed rate important for cash flow?
 Is a low down payment important?
 Does the business want protection in the event of a
devaluation of real estate?
3
Benefits to the Borrower

Financing for a fixed asset project with only 10% injection.

Long-term, fixed rate funds…enhancing cash flow for
business.

SEED’s effective rate as of March 2011 is:
- 5.8% on a 20-year debenture
- 4.4% on a 10-year debenture

Ability to include soft costs, equipment and furniture and
fixtures in a real estate project…enabling businesses to
minimize out of pocket expenses and preserve cash.

Lower down payment conserves working capital.
4
Benefits to the Bank

Bank’s maximum loan-to-value is typically 50%,
minimizing risk and improving liquidity.

Ability to provide 90% financing to a small business client.

Can include soft costs, equipment, and furniture and fixtures
in overall project.

Program allows reliance on financial projections – for
startups and businesses with inadequate historic cash flow.

The bank’s first mortgage can be sold in the secondary
market for a premium.

The CDC is responsible for all of the paperwork!!
5
Other Considerations

There is a prepayment penalty for the first half of the term
of the debenture.

The debenture is assumable by another borrower.

The fees on the 504 loan currently total 2.15%; however,
they are financed with the 504 loan.

The minimum project size is $250,000.

SEED’s 504 loans range from $100,000 to $5.0 million
for standard industries and up to $5.5 million for
manufacturers.

SEED’s other loan programs can be used in conjunction
with 504 projects, or can replace the SBA 504 portion on
small projects.
6
Structure of a Typical $1 Million Project
Entity
Loan
Amount
% of
Project
Lender
$500,000
50%
1st Mortgage
SEED/SBA
$400,000
40%
2nd Mortgage
Borrower
$100,000
10%*
TOTAL:
$1,000,000
100%
Security
Total Debenture: $409,000 (rounded up)
(Up front fees include 2.15% on $400,000)

* Projects that involve a new business and/or special purpose building will require
an additional 5-10% from the borrower.
7
Fees Charged by CDC
Financed as part of 504 loan – 2.15% of net debenture
CDC Processing Fee:
1.50%
Underwriting Fee:
0.40%
Covers expense of pooling & underwriting 504 debenture,
paid directly to Merrill Lynch
Funding Fee:
Paid to Central Servicing Agent (Colson Services)
Total:
0.25%
2.15%
8
Effective Rate
Rate the borrower actually pays
Note rate (as of 3/11 Sale)
Plus Fees:
Annual Central Servicing Agent Fee
CDC Servicing Fee 
SBA Fee
Total Fees
SEED’s Effective Rate (As of 3/11)
4.154%
0.100%
0.825%
0.749%
1.674%
5.828%
 SBA Required Servicing Fee – This fee can go up to 1.5%. CDC’s
Servicing Fees vary and impact the client’s effective rate!
9
Legal Fees
Closing costs are financed into the gross
debenture & paid to CDC’s closing attorney
Legal Fee – Maximum of $2,500
Other Eligible Closing Costs:





Title Insurance
Recording fees
Flood Insurance
Filing fees and title searches
Surveys
10
What’s needed for SEED
to approve a 504 request?

Purchase & sales agreement for project property and cost
parameters for construction/renovation projects.

Three years of tax returns and/or financial statements for the business.

Information on the borrower’s existing debt.

Personal financial statement and two years of personal tax returns
for each principal of the business (20% or more ownership).

Property appraisal and environmental assessment can be submitted to
SEED after approval.
NO APPLICATION FORM IS REQUIRED!!!
WE USE ESSENTIALLY THE SAME UNDERWRITING
DOCUMENTATION AS THE BANK!!!
11
The 504 “Process”

Borrower or the bank submits a loan package to SEED.

The loan request is presented to SEED’s Loan Review
Committee (the Committee meets as needed).

A SEED commitment letter is sent to the borrower and bank.

Loan is packaged and forwarded to SBA for issuance of
the SBA Authorization (3 day turn around).

Bank closes on permanent loan and the bridge loan.
SEED closes simultaneously on turnkey projects.

SEED/SBA payoff the bank’s bridge loan in 90 days on
turnkey projects or after the project is completed
(construction & renovation projects).
12
Uses of Funds
Fixed-Asset Acquisition or Expansion Including:





Purchase land & construction of new buildings
Purchase and/or renovate existing buildings
Acquire/Install machinery & equipment
Refinance existing fixed asset debt up to 50%
of new SBA 504 Project
Soft costs related to the project (appraisal,
environmental, interim interest, other)
Ineligible uses of funds:



Purchase of trucks and autos
Working Capital
Franchise fees
13
Bank’s Permanent First Mortgage

Permanent financing must be for at least 10 years –
(on a 20-year debenture) with no balloon payments
during that time.

Interest rate on the bank’s mortgage is set by bank.

Bank can charge points.

One-time fee of 0.5% on the bank’s first mortgage portion
(currently being paid by SEED Corporation up to the CDC
processing fee).
14
Occupancy Requirements

Existing Building:
Business must occupy at least 51%
- may lease out up to 49%

Newly Constructed Building:
Business must initially occupy at least 60%
- must occupy up to 80% within 10 years
- can sublease 20% indefinitely
15
Job Requirements
Create/Retain one job for each $65,000 borrowed through the 504
Program unless the project meets a Public Policy Goal.
Public Policy Goals:









Rural Development
Expansion of Minority, Women or Veteran-Owned Businesses
(51% + owned)
Expansion of Exports
Business District Revitalization
Enhanced Economic Competition
Restructuring Due to Federally Mandated Standards and/or
Policies
Changes Necessitated by Federal Budget Cutbacks
Manufacturing businesses – one job per $100,000
Energy-consumption reduction of at least 10% or sustainable
design or equipment and process upgrades
16
Why YOU Should Consider a
SEED/SBA 504 Loan
 Up to 90% financing for project
 Lower down payment for client; improved liquidity for
bank
 SEED provides quick & efficient turn around
(SBA approved for the Abridged Submission)
 Note is assumable by another borrower
 SEED provides loans up to $200,000 at 5% fixed
to replace the down payment
 SEED is responsible for all the paperwork
www.SEEDCORP.com
17