What is SBA?
The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. Small businesses are critical to America’s economic recovery and strength, to building America’s future, and to helping the United States compete in today’s global marketplace. Although SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same. The SBA helps Americans start, build and grow businesses. Through an extensive network of field offices and partnerships with public and private organizations, SBA delivers its services to people throughout the United States, Puerto Rico, the U. S. Virgin Islands and Guam.
What is an SBA 504 Loan?
The 504 loan program is an economic development program designed to provide fixed rate, long-term financing for fixed assets while stimulating employment through job creation and retention.
Am I eligible for the 504 Loan?
To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it, along with its affiliates, do not have a combined tangible net worth in excess of $15 million and do not have a combined average net income in excess of $5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate. Some other businesses are ineligible. Please contact one of our team members to determine the entire eligibility of your business.
Complete our checklist to see if your small business is eligible.
How much can I borrow under the SBA 504 Loan Program?
The maximum SBA exposure is $5,000,000. However special circumstances allow the exposure to increase to $5,500,000, such as loans to manufacturers or loans that improve energy consumption and fall under the Energy Loan Program.
How long do I need to be in business to get this loan?
Loans can be made to a small business, whether it is a start-up or an existing business. A start-up business requires an additional down payment of 5% of the project costs. Start-up businesses will require a business plan and reasonable projected financial statements. Here are resources to assist you with these projections.
What is a CDC?
A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide the financing to small businesses. NWBDA is certified as a CDC in Washington, Northern Idaho and Northern Oregon.
What can I use the proceeds for?
Proceeds from 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, architectural and engineering plans, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment. The program can also be used to refinance existing commercial loans whose proceeds were used for eligible 504 project costs.
The 504 Program cannot be used for working capital, inventory, or intangibles, such as goodwill.
Can my real estate holding company own the building?
Yes, a separate entity may own the real estate as long as it does not engage in any other business activity. In addition, there must be a signed lease between the entities for at least the term of the SBA loan. The monthly lease payments cannot exceed the loan repayment amounts, taxes, insurance, and maintenance.
Does my business have to occupy all of the building?
No, if you are purchasing an existing building, the operating business must occupy at least 51% of the rentable square footage of the property. For new construction, the operating business must occupy 60% immediately, some additional within 3 years, and 80% within 10 years. 20% of the building may be permanently leased out.
How is an SBA 504 project financed?
An SBA 504 project has three main components: A third party lender who provides 50% or more of the financing, a Certified Development Company (CDC) who provides up to 40% of the financing, and the applicant (borrower) who provides at least 10% of the financing.
If the borrower is a start-up business (generating revenue less than 2 years) or the property is a special use property then the applicant’s share of the project increases to 15% and the CDC’s decreases to 35%. If both of the above are true, start-up and special use, then the applicant’s share would increase to 20% and the CDC’s reduced to 30%. If the borrower has an outstanding debenture on a special purpose property, then the applicant’s share increases to a minimum of 20%.
What is a special use property?
Businesses with a Limited or Special Purpose Property must contribute at least 15%.
For any business with (including affiliates) that has an outstanding debenture for a Project involving a Limited or Special Purpose Property, for each subsequent Project involving a Limited or Special Purpose Property, the borrower must contribute 20%.
Below is a list that contains examples of properties that SBA considers to be a Limited or Special Purpose Property. This list is not intended to be all-inclusive and SBA may determine that other properties meet the Limited or Special Purpose Property definition.
i) Amusement parks;
ii) Bowling alleys;
iii) Car wash businesses;
v) Cold storage facilities where more than 50% of the total square footage is equipped for refrigeration;
vii) Farms, including livestock and dairy facilities;
viii) Funeral homes with crematoriums;
ix) Gas stations;
x) Golf courses;
xi) Hospitals, surgery centers, urgent care centers and other health or medical facilities;
xii) Hotels, motels, and other lodging facilities;
xv) Nursing homes, including assisted living facilities;
xvi) Oil wells;
xvii) Quarries, including gravel pits;
xix) Sanitary landfills;
xx) Service centers (e.g., oil and lube, brake or transmission centers) with pits and in-ground lifts;
xxi) Sports arenas;
xxii) Swimming pools;
xxiii) Tennis clubs;
xxiv) Theaters; and
Must the applicant's equity contribution be in cash?
The borrower’s equity contribution may be in the form of cash or equity in an asset previously acquired such as land, or land and buildings if the applicant is adding another building to the same property. In some cases, part of the equity can be borrowed, gifted, or on a seller carry back note.
Can the Borrower's contribution be borrowed?
Although it is preferred that the borrower’s contribution be in cash or equity, a portion of the contribution can be borrowed as long as: 1) the lien position is subordinate to the 504 loan, if secured by the project property, 2) the borrower cannot repay the loan for the equity contribution at a faster rate than the 504 loan, if secured by the project property, and 3) the borrower must demonstrate repayment ability for the borrowed funds.
Are all franchises eligible for SBA financing?
SBA requires review of a franchise agreement, license agreement, membership agreement, co-op agreement, dealer agreement, jobber, or similar agreement to determine if an affiliation exists that would disqualify the applicant from the program. A review of acceptable franchises are listed on the SBA Franchise Directory.
Does the small business need to create jobs?
The SBA 504 loan program has economic development objectives to create or retain at least 1 job per every $75,000 (or per every $120,000 for manufacturing) of project debenture. This requirement can be waived under certain community or public policy goals. Please contact one of our knowledgeable business development officers for a list of these policy goals.