Are They for You and How Do They Work
If you’re looking for ways to finance the real estate or equipment your business needs, you should consider getting an SBA 504 Loan.
From the building next door that will make the perfect addition to your store to the machines that will cut your production times, the SBA offers a financial solution through its 504 Loan program.
What Is an SBA 504 Loan
These are loans guaranteed by the U.S. Small Business Administration and intended to provide long-term financing for purchasing property, building, equipment, furniture, and other fixed assets for your business. SBA 504 loans offer low-interest rates, 10- to 25-year terms, and a 10% to 20% down payment.
There are three parties involved in an SBA 504 loan:
- You (a.k.a. the borrower)
- The bank
- The SBA-approved certified development company (CDC). CDCs are nonprofit corporations that promote economic development within the community. They are regulated and certified by the SBA and work closely with banks to offer financing to small businesses. CDCs have a specified Area of Operations which means you need to look for the CDCs in your state when prepping to apply for an SBA loan.
How SBA 504 Loans Work
Since 504 loans are a three-party financing tool, each side is required to cover certain portions of the requested amount, including you, as the borrower. To break down each part’s contribution, the loan looks like this:
- 10% – Down payment: You need to cover 10% of the amount. Bear in mind, special use properties (e.g., bowling alleys, gas stations, theaters – properties that require larger capital to be converted for a different purpose), and startups have to put more money down (15%).
- 40% – CDC loan: The CDC that the SBA has approved, will finance 40% of your loan.
- 50% – Bank loan: Your bank or direct lender will extend half of the total loan amount.
Note that the SBA does not regulate the terms and eligibility requirements set by the banks. They are free to set their own terms and requirements.
How Much Money Can You Get
The maximum amount of money you can apply for is $20 million per loan for purchasing equipment, real estate, and upgrading existing facilities. The CDC can offer up to $5 million (reaching up to $5.5 million for manufacturing businesses and green energy companies), while the portion of the bank can be double or even triple the CDC size.
Regardless of the total loan amount, you will be required to put down 10% (or higher for startups and special use properties).
What About the Down Payment?
If this isn’t the first business loan option you’re looking at, you will know that most bank loans require a 20% down payment and higher. That’s why the SBA 504 loan is small business-friendly since it only requires 10%.
This money can come out of your personal savings, other personal assets, retirement money, and additional sources (e.g. money from friends and family).
If you own more than 20% of the business, the SBA will require you to sign a personal guarantee. This is necessary to decrease the risk for the lender in case you are unable to repay the loan. In case your business assets are insufficient to cover your loan payments, the lender is authorized to seize the assets from your personal guarantee.
Who Qualifies for an SBA 504 Loan
Qualifying for this type of loan isn’t easy, and they are typically provided to creditworthy borrowers and well-established businesses. To be eligible for a 504 loan, you need to:
- Meet the size standards for small businesses issued by the SBA
- Have a business that is for-profit and not operate in a passive industry (e.g., real estate investing)
- Have an average net income of no more than $5 million & a tangible net worth of less than $15 million for the two years prior to application (this is after federal income taxes)
- Prove your project will create and/or retain jobs or promote public policy goals (e.g., bringing new income to the community, improving the local economy, modernizing facilities to meet safety requirements, etc.)
- Meet the owner-occupancy requirements (in the case of buying or renovating a building, the business owner/applicant must occupy at least 51% of the property)
How to Apply for an SBA 504 Loan
You can start by finding the CDC. The SBA has a finder tool or approved CDCs, and once you have a CDC, they can direct you to a local bank.
You need to prepare yourself for a lengthy application process because finding a CDC and a bank that is willing to cover their respective portions of the loan is only the beginning.
Be ready to put together your business plan, historical financial statements, business tax returns, current debt schedule, business bank statements, your loan application history, and other documents.
It can take about several months to get your business loan approved and funded.
Good luck and don’t forget our motto: First survive, then thrive!