Administration 504 Loan
Description: The objective of the Small Business
Administration (SBA) 504 loan program is urban economic development
and job creation through expansion of the nation's small businesses.
This program combines the guarantee authority of the SBA with the
capital formation abilities of both commercial banks and public finance
markets. The 504 loan Program is established to provide long term
fixed-asset financing. SBA's 504 loan resources are generated by
issuing government-guaranteed debentures, which are pooled monthly
and sold through a certificate mechanism to the public market.
Use of Funds: Funds may be used for commercial/industrial real estate acquisition,
construction or renovation, leasehold improvements, and purchase of equipment
with a life of 15 years.
Eligibility Criteria: To be eligible, a business must meet
the following: (1) have at least a three year operating history (2) a tangible
net worth of less than $6 million (3) a previous two-year average annual net
profit of less than $2 million (4) occupy a minimum of 51% of the space of
an existing building or 67% if a new building is constructed (5) there must
be sufficient cash flow on a historic basis to cover projected debt service
and (6) Borrower must have an acceptable credit history. Non-profit companies
are not eligible.
One new job must be created for every $35,000 of 504 loan proceeds.
Loan Amounts: Loan amounts range from $50,000 to $750,000
or $1 million for projects meeting one SBA's public policy goals which include:
business district revitalization, expansion of exports and expansion of minority
business development. The maximum 504 participation is 40% of the project cost
and there must be a minimum owner equity injection of 10%. The bank or private
lender finances the remaining 50%.
Fees: Loan fees are approximately 3% of the loan amount plus
$2,000 for legal fees.
Rate: Fixed rate determined at the time of the debenture sale (approximately
1% over the comparable term Treasury Market Rate and includes 1/2% annual servicing
Term: The maximum term shall not exceed 20 years on real estate loans and
10 years on equipment/machinery loans. 504 loans are fully amortized.
Collateral: The primary collateral shall be a second deed of trust on real
estate and/or security interest in equipment or machinery. Personal guarantees
will also be required.