Q: How much paperwork is involved?
A: Any loan requires a standard application with supporting documentation. We will walk you through the process, simplify the requests and handle all of the communications with SBA for you.
Q: What is the turn around time?
A: Once a complete package is received from a lender or borrower, a credit analyst can provide a statement of pre qualification in a matter of days. For a written letter of commitment and loan authorization from SBA the time line is 1 to 2 weeks. From the time of the loan request to the time of disbursement of funds to a lender varies depending on the complexity of the project and how quickly appraisals or environmental reports are completed.
Q: What is the maximum loan amount?
A: The maximum debenture for an SBA 504 loan is between $1.5MM and $4,000,000. These amounts only refer to the CDC/SBA share of the project. The total size of the project is unlimited.
Q: How quickly will you provide funds to me?
A: After a borrower puts in their own contribution of between 10% to 20%; the lender provides the remaining 80% to 90% of the funds. Upon receiving a Certificate of Occupancy, the CDC will initiate the sale of a debenture. The proceeds from the debenture go to the lender, not directly to the borrower.
Q: What if my bank doesn’t want to do a 504 loan?
A: Our office will work with any bank or non-bank lender and will handle all of the SBA paperwork for them. Any borrower can call our office directly to receive an application and/or referral to a lender familar with the 504 loan process.
Q: My CPA suggests holding the real estate in my personal name, in order to receive tax benefits. Can I do that with a 504?
A: You can hold the real estate in your personal name or in another legal entity; which will then be referred to as an “eligible passive concern (EPC)”. Your business will be the “operating company (OC)” and will lease the space from your EPC. Make this decision as early as possible in the loan process.You will need to provide corporate documents if you form an LLC and all of the paperwork associated with your loan approval needs to be in the correct borrowing entities name.
Q: What are the main advantages of a 504 loan?
- lower down-payment requirements
- long repayment terms (20 years)
- fixed rate for the term of the loan
- projected income is considered, not just historical cash flows
- collateral is typically the building being financed
Q: How is a 504 loan structured?
A: Most 504-financed purchases are for office, retail or industrial buildings. SBA-504, fixed-rate loans finance 40 percent of the total purchase. A bank or other lender provides 50 percent and the business owner contributes a 10 percent down payment. For example, if the building purchase price is $1,000,000, the following would be the loan structure:
- Bank 1st mortgage – $500,000
- CDC 2nd trust deed – $400,000
- Borrower downpayment – $100,000
Q: How long does it take to get a 504 loan?
A: Straight purchases usually require no more than 60 days to fund. If construction is involved, this can extend the process.
Q: What are the fees involved?
A: All the fees are financed into the loan; consisting of 2.625% of the loan amount plus legal fees of $2,500.
Q: Are there prepayment penalties?
A: There is a declining prepayment penalty for the first 10 years of the loan, based on the loan amount and funding rate.
Q: Can other costs be included in a 504 loan?
A: Yes, “soft costs” (e.g. appraisals, environmental, construction interest, closing costs) also can be financed in the 504 loan, allowing the small business to preserve working capital.
Q: What is the maximum loan you can do with a 504?
SA: BA-504 loans can finance up to 40% of the total project cost, or $5 million. For manufacturing businesses, 504 loans can finance up to $5.5 million.
Q: How big can the company be?
A: The business tangible net worth must be less than $15 million. After-tax net profit must be $5 million or less, on average, for the prior two years.
Q: How much space does the business have to occupy?
A: The business must occupy 51% of an existing building purchase or 60% if constructing a new facility.
Q: What kind of equipment can be financed with a 504 loan?
A: Long-term machinery and equipment with a useful life greater than 10 years (e.g., a printing press).
Can home equity lines of credit be used for the borrower down payment?
A: If equity is borrowed and secured by another asset, CDC must demonstrate repayment of the loan for the equity contribution from sources other than the cash flow of the business (salary of owner does not qualify).