Small Business Administration - SBA 504 Loans
FINANCE
The SBA 504 loan works very well if you want to grow your business by adding assets. It offers the benefit of longer repayment terms than traditional loans.
It also offers the advantage of working closely with a Certified Development Company (CDC), a nonprofit organization specializing in this type of financing.
SBA 504 loans from the Small Business Administration – SBA
Unlike SBA 7(a) loans, the SBA 504 loan offered by the Small Business Administration (SBA) is specifically designed for the acquisition of fixed assets, such as equipment or real estate.
This type of loan can help small businesses that don't qualify for a conventional loan.
The terms of these loans are very favorable, with longer terms, low costs, and the assistance of a Certified Development Company specializing in this area.
This program is not as popular as SBA 7(a) loans, but it may be more convenient for businesses looking to cover the costs of assets necessary for their operations.
Key Features
• The SBA 504 loan helps finance the purchase of fixed assets that drive business growth.
• is offered through local Certified Development Companies
• It can finance projects of up to $5 million for the purchase of fixed assets.
• Its fee structure is more complicated than other SBA loans.
What is an SBA 504 Loan?
An SBA 504 loan is a long-term loan designed to finance major assets, including equipment and real estate. It is focused on the acquisition of assets that support business growth or promote the creation of new jobs.
Like all SBA loans, it is partially guaranteed by the United States government.
What is a Certified Development Company?
A Certified Development Company (CDC) is a nonprofit organization certified by the SBA that fosters community development in the community where it operates. These community-based companies provide resources to facilitate the application process for an SBA 504 loan.
This link can help you find a CDC in your area List of Certified Development Companies
How does a SBA 504 operate
These loans can provide funding of up to $5 million and are open to applications for both energy efficiency improvements and manufacturing projects.
The SBA 504 loan is guaranteed by the SBA for up to 40% of the loan amount. This guarantee is much lower than the SBA 7(a) loan, which is guaranteed for up to 85% of the loan amount.
Another portion of the 504 loan is guaranteed by a third party, such as a bank or credit union. This third party can guarantee up to 50% of the loan, so the applicant must cover the remaining 10%.
SBA 504 Loan Interest Rates
The interest rates on this loan are set based on the market rate for 10-year U.S. Treasury bonds. These rates are typically around 3% of the loan amount.
SBA 504 Loan Fees
Fees for this loan can be rolled into the loan rather than being paid upfront.
These are the commissions:
•Anual service commission: 0.4405%
• Lender's commission : 0.50%
• CDC commission: 0.625% +
SBA 504 Loan Repayment Terms
This type of loan offers maturity terms of 10, 20, and 30 years. Repayment terms may differ for the bank portion versus the Certified Development Company portion.
What can a SBA 504 loan be used for
This loan can be used to acquire assets that will support business development, such as:
• Purchase of Land, Real Estate, Commercial Equipment for Long-Term Use
• Improvement projects for existing buildings and land, landscaping, parking, streets and utilities.
Exclusions
• Working Capital
• Inventory acquisition
• Speculative buying
• Debt consolidation
• Re-financing or repayment of debt
• Income property
SBA 504 Loan Requirements
To obtain an SBA 504 loan, you must meet certain minimum SBA requirements, in addition to CDC and lender requirements. These requirements may vary but are generally very competitive.
Requirements to get a 504 Loan include:
• Comply with the definition of an SBA Small Company
• Repayment capacity
• For profit company
• Based in the US or it's territories
• Net worth under $15 Million
• Average net profit after taxes under $5 Million during the last two years
• Inability to get conventional ;loans.
How to apply for a SBA 504 Loan
These are the application requirements:
• Find a Certified Development Company – CDC through the SBA local tool
• Contact the selected CDC to start the application process
• Every high level employee or shareholder with more than 20% participation must submit an application
• Submit commercial and financial documents
• Wait between 30 to 90 days for approval
Summary
The SBA 504 loan works very well if you want to grow your business by adding assets. It offers the benefit of longer repayment terms than traditional loans.
It also offers the advantage of working closely with a Certified Development Company (CDC), a nonprofit organization specializing in this type of financing.
However, it is limited in terms of the use of funds, and you must meet both SBA and borrower requirements to qualify.
On top of all that, these loans are extremely slow to process, while other lenders offer access to fast funds within days.