SBA 504 Loan Program
History
What is the SBA?
•
Small businesses have long been recognized as the backbone of the American
economy. They are the movers and shakers in America - the people with the ideas,
energy and drive to build and run a business. Small businesses are also where new
jobs are being added to the economy as companies grow and hire more staff.
•
To support small businesses and to strengthen the economy, Congress created the
U.S. Small Business Administration (SBA) in 1953 to provide a range of services to
small businesses, including financing.
Objective
What is the SBA 504?
•
SBA 504 is a loan program created in 1980 by SBA to finance the commercial Small
real estate and equipment needs of small businesses.
•
The program offers a competitive long-term, fixed-interest rate.
•
It’s designed to assist for-profit businesses operating in the US.
•
The community gets the benefit of additional jobs, business growth, and tax revenues
from a growing small business.
•
The results are a win-win for both the small business owner and the community.
504 Loan Program
•
Typically, a 504 project includes:
– A loan secured by a first lien from a private-sector lender that finances at least
50% of an eligible project’s cost.
– A secured second lien from a CDC (backed by a 100% guaranteed debenture) that
funds up to 40% of the project’s cost.
– The small business is required to inject at least 10% of the eligible costs. New and
limited purpose businesses may be required to inject additional equity up to a
maximum of 20%.
•
A CDC (Certified Development Company) is an organization designated by the SBA to
provide funding for small businesses under the SBA 504 program. There are
approximately 270 CDCs nationwide, each covering a specific geographic area. The
SBA’s office of Lender oversight oversees each CDCs’ compliance with all applicable
rules and regulations. To retain its certification, a CDC must provide at least four 504
loan approvals during two consecutive fiscal years. Under the Preferred Lenders
Program, CDCs receive the authority to approve loan for the SBA, thereby expediting
loan processing.
Typical 504 Structure
Borrower
10%
Bank Loan
50%
Total Project Cost
$1,000,000
504 Debenture
Loan
40%
$500,000
Negotiable rate i.e. WSJ Prime + 2% or LIBOR + 5.5%
$400,000
20-yr fixed rate indexed to 10-yr US Treasury yield
$100,000
Borrower’s Equity
504 Loan Program
Project Cost Eligibility
•
Eligible uses of funds:
– Purchase land & construction of new buildings
– Carry out renovation or expansion of existing buildings
– Purchase machinery & equipment with a useful life of 10 or more years
– Soft costs directly related to the project (appraisal, environmental, interim
interest)
– Business acquisition
•
Ineligible uses of funds:
– Automotive Purchases
– Working Capital
– Inventory
– Real Estate Investment Properties
– Goodwill
– Franchise Fees
504 Loan Program
Project Eligibility
Minimum Owner Occupancy:
• Existing Building 51%
• New Construction 60%
– 20% permanently leased
– 20% to be occupied in 10 years
Total Project Size:
• Min = $200,000
• Max = $25MM
Borrower Equity Contribution:
• Typical 10%
• Start-up 15%
• Special Use 15%
• Both 20%
Max Debenture Amount:
• $5,000,000 for normal loans
• $5,500,000 for manufacturers &
SBA 504 ‘Green Loans’
504 Loan Program
Business Eligibility
•
•
•
For-Profit & Privately Held
Small or Medium Sized (as defined by the SBA)
– Tangible Net Worth < $15 million
– Income After Taxes < $5 million (for the preceding two years)
Creates or Retains Jobs*
– Or meets a public policy or community development goal of the SBA i.e.
expansion of exports, energy-consumption reduction of at least 10%, etc.
*1 job per $65,000 in Debenture funding – Normal
*1 job per $100,000 in Debenture funding – Small Manufacturers
504 Loan Program
Lender 1st Mortgage:
• Any term is allowed but it should be at
least half that of the SBA Loan.
Typically it is 10 to 20 years.
•
Interest rate can be variable - adjusted
monthly, quarterly, or annually.
Indexed to WSJ Prime, Commercial
Paper, or LIBOR
•
It can also be Fixed rate for 5 -10 yr.
(or full loan term) - indexed to LIBOR,
Fed Home Loan Bank, US Treasury,
etc.
•
Typically lenders charge a 1% to 2%
origination fee. There may also be an
interim loan fee.
SBA 504 Debenture:
• Term & maturity 10 or 20 years
•
20-yr fixed rate indexed to 10-yr US
Treasury yield
•
One-time third party lender fee paid to
the SBA equal to 0.5% of 1st Mortgage.
504 Loan Program
Debenture
Prepayment Penalty
Prepayment Penalty
SBA 504 Debenture Amount:
• Prepayment penalty declines by 10%
per annum starting at 100% of one
year’s interest based on the remaining
principal balance of the debenture
amount. See table 
Lender Amount:
• Prepayment penalty on lender’s 1st
Mortgage is as per the lender’s
policies
Year
%
(of 1 year’s
interest)
1
100
2
90
3
80
4
70
5
60
6
50
7
40
8
30
9
20
10
10
11+
0
Loan Application Process
The Borrower submits the
loan application to the
lender
The Lender underwrites
the deal and forwards it to
the CDC
It takes approximately 1014 days to receive the loan
authorization from the SBA
After receiving
authorization, the lender
closes the loan and funds to
an escrow account
The CDC underwrites and
packages the loan and
submits to the SBA
Loan Application Process
•
Borrower submits the loan application with all the relevant documents to the bank or
non-bank lender.
•
The lender reviews and underwrites the project, and then forwards it to the CDC if it
approves internally.
•
Typically, lenders and CDCs perform simultaneous underwriting for the loans they
provide, although lenders will contact CDCs after they have conducted their
underwriting. In analyzing potential loans, lenders and CDCs look at traditional
underwriting criteria, including management and cash flow. Lenders and CDCs may
contact each other during the underwriting period to discuss any concerns they may
have with projects.
•
CDC Packages the Loan and forwards it to SBA for issuance of the SBA Authorization
(10-14 day turn around)
Loan Application Process Continued
•
After receiving SBA authorization, the lender closes on permanent loan and bridge
loan and fund the escrow account.
•
Although closing documents may be signed for lender loans and CDC loans
simultaneously, CDC loans do not get funded until the SBA debentures guaranteeing
the loans are sold. Therefore, for example, although the interest rate on a lender loan
is set at closing, a borrower does not know the interest rate on the CDC loan until the
debenture is sold. Closing documents for CDC loans are signed, leaving space for the
interest rates to be added when they are available. CDCs can provide historical rates
to borrowers as a guide to what the final rates may be. Because debentures are not
commonly sold until 30 to 60 days after closing, projects usually require interim
financing from lenders. Traditionally, interim financing is offered by the lender
providing the first-lien loan
Benefits of an SBA Loan for the Borrower
•
Financing for a fixed asset project with as little as 10% injection offers an
affordable down payment for small business owners.
•
Lower down payment conserves working capital which plays a key role for
successful business operations.
•
The debenture is a 20-year fully amortized note. This enables the borrower to
pay for a facility over the long term and enjoy lower monthly payments.
•
Fixed rate payments help to improve predictability and reduce volatility of the
business cash flows
•
An opportunity to include soft costs, equipment, and furniture and fixtures in a
real estate project enabling businesses to minimize out of pocket expenses and
conserve cash.
Benefits of an SBA Loan for the Borrower
SBA 504 Loan vs. Conventional Loan – Borrower Contribution
504 Financing Structure
Eligible Project Costs
Land/Building
$500,000
Renovation
$400,000
Equipment
$50,000
Soft Costs
Third Party
Lender
$500,000
50%
504 Portion
$400,000
40%
Borrower
Contribution
$100,000
10%
Total Sources
$1,000,000
100%
Title Charges
$3,500
Recording Taxes
$15,000
Appraisal
$3,500
Environmental
$3,000
20% of Hard Costs
$190,000
Architect/Engineer
$15,000
Soft Costs
$50,000
Bank Points
$10,000
Borrower Contribution
$240,000
Conventional Financing Structure
Benefits of SBA Loan for Lender
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Retaining the first lien position with little exposure (typically 50%)
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Ability to provide 90% financing to a small business client with participation of SBA
resulting less risk and more liquidity.
•
504 allows to finance based on financial projections supported by realistic business
plans – for startups and businesses with insufficient historical cash flow.
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Onus is less on lenders. The CDC is largely responsible for all of the paperwork and
post-closing audit.
•
Availability of secondary market where the lender can sell the first mortgage and
earn the premium. As a result, they can lend more and improve their credit flow.
•
Can include soft costs, equipment, and furniture and fixtures in overall project.
Contact Us
If you’d like to know more about the SBA 504 product, or any other
products or services AVANA Capital offers, please contact us and
we’ll be happy to assist.
Toll Free:
877.850.5130
Fax:
623.321.6171
Email:
avanateam@avanacapital.com