SBA 504 Loan Program
SBA 504 loans are geared toward healthy, expanding for-profit businesses seeking long term, low down-payment financing for major fixed assets. It cannot be used for working capital or inventory.
The SBA 504 Loan Program is a lending partnership featuring your bank, with its fixed or floating rate loan and the Certified Development Company (CDC), with a 10 or 20 year fixed rate loan.
- SBA 504 loans are geared toward healthy, expanding for-profit businesses seeking long term, low down-payment financing for major fixed assets: e.g., real estate acquisition, building construction, or major equipment purchase.
- The 504 Program cannot be used for working capital or inventory.
- Under the 504 Program, the business qualifies as small if its tangible net worth does not exceed $15 million and does not have an average net income in excess of $5 million after taxes for the preceding two years.
- There must be creation or retention of jobs (one full time job must be created per $65,000 in CDC funding).
- The project must also be owner-occupied, but can sublease out a portion of the building.
- Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
The normal maximum loan amount is $5 million and minimum project size is $120,000. SBA loans will be collateralized to the fullest extent possible and require the personal guaranty of the principals.
Typical Financing Structure
- A typical financing structure is 50% of the project costs borrowed from a bank secured by a senior lien
- A loan secured from the CDC/SBA covering up to 40% of the total cost
- And at least 10% in equity from the borrower. Start-up businesses and special use projects will require 15-20% equity.
- The SBA portion is a subordinated loan with a fixed interest rate and a maturity of 20 years if real estate is involved or 10 years if the loan is used only for equipment.
- The interest rate is set at the time of closing and is dependent upon market conditions.
- The CDC handles projects on behalf of SBA. The St. Louis Local Development Co. (LDC) is a Certified Development Company (CDC) for the state of Missouri. The loan process requires approval of both the CDC and the SBA.
SBA 504 Fees
- Participation Fee: One-time, up-front fee paid to the SBA by either the participating bank or the borrower. The fee is equal to ½% of the senior mortgage associated with the 504 project and is due to the SBA at closing.
- Processing Fee: This fee compensates each service provider in the 504 process. These include the CDC, SBA, underwriter and fiscal agent. The processing fees are one-time-only fees and are approximately 1.75% of the 504 loan. Processing fees can be added to the amount borrowed and amortized over the life of the loan. One Thousand Dollars ($1,000) of this fee is due when the application is submitted, and is refunded only if the application is not approved.
- Servicing Fee: This annual fee is approximately 1.6% of the outstanding balance of the loan and is paid over the life of the loan. The fee is automatically added to the borrower's monthly payment.
- Legal Fees: The borrower is responsible for all legal fees and costs associated with closing the 504 loan. The LDC charges a fee of $2,000 for our legal services in preparing for closing.