Basics of SBA 504 Loan Program
1) What is a CDC?
A Certified Development Company (CDC) is a private entity certified by the U.S. Small Business Administration (SBA) to provide SBA 504 loans. Every prospective CDC must undergo an evaluation process with the SBA before receiving this designation. The key role of the CDC is to assist qualifying businesses in obtaining 504 financing from the SBA in partnership with a private lender — commercial or community bank, credit union or other third party lenders. The SBA requires that a CDC must be the originator of every 504 loan regardless of the type of business, industry or other circumstances.
2) What is an SBA 504 loan and what are the benefits?
The SBA created the 504 loan program in 1980 to provide financing to help small- and medium-sized businesses grow and expand their operations through providing access to capital for owner-occupied commercial real estate, major equipment purchases and energy efficiency projects at below-market interest rates and with low down payments.
Benefits of SBA 504 Loans
• Low down payment: As low as 10% cash down, which frees up working capital for other purposes. Single-purpose facilities or start-up businesses require a slightly higher down payment.
• Long-term, below-market, fixed rates: SBA 504 loans are fixed for 10 or 20 years, fully amortized.
• Only 51% occupancy required for the acquisition of existing properties. Businesses must occupy 60% for new construction.
3) Is my business eligible?
Businesses must fit the following profile:
• For-profit and owner-operated
• Net worth less than $15 million
• After-tax annual income less than $5 million, on average, for the prior two years
• Occupy at least 51% of a building or 60% of a newly constructed property
• Less than 500 employees (for manufacturers)
For businesses using SBA 504 loans for equipment or energy efficiency, the useful life of the equipment must be more than 10 years and the energy efficiency improvements should reduce usage by at least 10%.
The Small Business Jobs Act effective September 27, 2010 revises the eligibility rules for passive income. Businesses that generate revenues from what is essentially rental income, i.e. hair salons, storage unit rentals, solar energy and windmill farms, etc. are now eligible for SBA 504 loans.
4) How can the SBA 504 loan proceeds be used?
The loan proceeds can be used to purchase, renovate or construct commercial real estate, make energy efficiency improvements to buildings, generate renewable energy/fuels, or purchase equipment.
The Small Business Jobs Act of 2010 initiates a new two-year program that allows SBA 504 loans to be used to refinance up to 90% of real estate loans coming due on owner-occupied commercial properties. Refinancing of up to 125% loan-to-value is permitted with additional collateral or cash injection. This allows refinancing of qualified existing debt without business expansion as was previously required.
5) How are the loans structured?
The SBA 504 loans are typically structured as follows:
Third Party Lender Financing
• First lien or mortgage loan
• Competitive rates and terms
California Lending Partners/SBA
• 10- or 20-year fixed rate loan up to $5.5 million for manufacturers or projects related to energy efficiency; $5 million for other loans
Cash Down Payment
• Borrower contributes a minimum of 10%. Percentage may vary (see #6 below)
6) What size down payment is necessary?
Typically SBA 504 loans provide 90% financing (comprised of CDC and third party lender) and the business owner is required to provide 10% cash down. If the loan is for a single purpose facility OR the business is a start-up, an additional 5% cash injection is required (or 10% if the business is both a single purpose facility and a start-up).
7) What is the maximum size of an SBA 504 loan?
The California Lending Partners/SBA portion can be up to $5.5 million if the business is a manufacturer or the proceeds will be used for an energy efficiency project; there is a $5 million cap for other businesses or purposes. Total project size is typically under $12 million but can be more if the down payment exceeds 10% or if the bank loan is more than half of the entire loan amount.
Rates, Payments and Fees
8) Am I able to prepay my SBA 504 loan?
Yes, the California Lending Partners/SBA portion can be prepaid and the penalty is a declining percentage of the balance for the first five or 10 years depending on whether the loan term is 10 or 20 years.
9) Can I refinance my loan from the third party lender (first mortgage/trust deed or lien) without prepaying my SBA 504 loan?
Yes, the California Lending Partners/SBA 504 loan will then subordinate to a straight refinance of your first mortgage/trust deed loan. The first trust deed generally has a higher interest rate than the SBA 504 loan which may make this an attractive option. Cash-out may be allowed if the proceeds are used for building improvements.