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What Is An Sba 504 Loan

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What is an SBA 504 Loan? Program overview.

The SBA 504 Loan Program typically has terms up to 20 years with a fixed rate on the CDC portion. At First National Bank Small Business Finance, we typically offer a 25 year term on the First Mortgage with rates that adjust every 5 years. There is no minimum size for an SBA 504 Loan, and they can typically be used for projects up to $10 Million or more.

Projects 504 Loans Are Used For

Unlike some 7 loans, the 504 program is more specific in terms of what you can use the funding for. In general, the money must be allocated toward expanding or modernizing your business. Expansion means more jobs, which is the heart of what the 504 program is all about.;

Examples of qualifying uses include fixed assets, such as owner-occupied commercial real estate, land, equipment, fixtures and furniture for your business, as well as necessary remodeling and upgrades that will help your business grow.;

Funds also can be used to pay professional fees essential to the project . Additionally, loan proceeds can be used to cover short-term costs associated with the main project.;

However, SBA 504 loans cant be used for working capital or inventory.;

Additionally, 504 refinancing loans are available, but there are restrictions. To qualify, a business must have been in operation for at least 2 years and the debt to be refinanced must be a commercial loan that meets these requirements:

  • Incurred for the benefit of the small business not less than 2 years before application for 504 refinancing
  • Proceeds were used to acquire 504-eligible fixed assets, such as real estate, land, equipment, etc.
  • Secured by 504-eligible fixed assets
  • On-time payments for the last 12 months

Benefits Of A 504 Loan

  • Lower down payment
  • Longer terms and amortizations
  • Low, fixed interest rate
  • Reduces Lender’s risk = better terms for the borrower
  • Flexible structure: seller note for down payment
  • Finance real estate and furniture and equipment into one loan
  • Finance soft costs and fees

Here are some examples of businesses that we have financed:

  • Manufacturers

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Things To Consider With An Sba 504 Loan

The SBA 504 loan can be a great loan program for eligible business owners or aspiring real estate investors looking to purchase and finance a new qualifying business or existing real estate. But keep in mind that while an SBA loan offers competitive rates, it’s a tedious and lengthy process that can take anywhere from 40 to 60 days to finalize. It’s suggested applicants should seek alternative financing first, like a conventional loan, before applying for the SBA 504 loan program — especially if they’re tight on time. It’s also important to note that there are considerable fees associated with an SBA loan, which currently through Sep. 30, 2020, are as follows:

  • Guarantee fee of 0.5% upfront.
  • Servicing fee of 0.3205% of the outstanding balance of the loan, which is charged annually.
  • Processing fee of 1.5%, which includes the processing of the loan and legal review.
  • Funding fee, which varies based on the loan type and amount.

While these fees can be rolled into the financing, it’s generally a higher-cost loan than a conventional loan program regarding fees.

If you think you would benefit from an SBA 504 loan, speak with a qualified mortgage broker or banker at an SBA-approved lending institution. Only certain banks have the ability to fund an SBA loan, so it’s important to find a banker or broker who is experienced with SBA loans and can help you navigate the application and funding process.

Current Sba 504 Loan Rates

SBA 504 Loan 101: What is a "Debenture" and How Does it ...

Prime: 3.25%

The following 20-Year Term Rate reflects rates August 2021:

Note Rate: 1.29%; ; ;Effective Rate: As low as 2.75%

;The following 25-Year Term Rate reflects rates for August 2021:

Note Rate: 1.47%; ; Effective Rate: As low as 2.87%

The following 10-Year Term Rate reflects the 504 bond salewhich took place in July 2021:

Note Rate: 0.85%; ; ;Effective Rate: As low as 2.60%

*10 Year bonds are sold every other month

;The rates above are provided for information purposes only. They do not constitute any guarantee of future loan rate.

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Sba 504 Loans Are For Real Estate Construction And Major Purchases

You can use an SBA 504 loan for the following expenses:

  • Buying or construction projects on existing buildings or land
  • Buying or renovating new facilities
  • Buying new machinery or equipment
  • Improving or modernizing land, streets, utilities, existing facilities and parking lots
  • Improving or modernizing landscaping related to your business

You can also use an SBA 504 loan to refinance debt, as long as it’s related to an eligible project. This includes bridge loans you received to cover the cost of a project while you waited for to receive your SBA 504 loan.

The SBA doesn’t allow you to use a 504 loan for the following costs:

  • Working capital or inventory
  • Speculation or investment real estate
  • Debt refinancing unrelated to an eligible project

Sba 504 Loans: What You Need To Know

The SBA 504 loan program, also called the Certified Development Company program, is designed to provide assistance for business owners with very specific requirements. This is not a general loan that can be used for whatever a business needs, nor is it designed for new companies that need startup capital. Instead, the 504 loan is designed to help businesses in need of purchasing fixed assets. These are generally things like real estate and equipment, but can also be fixtures, new buildings, machinery and the like. The loan is also designed to allow those purchases at below market rates.

The SBA explains it this way: The SBA 504 loan program is a powerful economic development loan program that offers small businesses another avenue for business financing, while promoting business growth, and job creation The 504 loan program provides small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. 504 loans are made available through Certified Development Companies , SBAs community-based partners for providing 504 loans.

There are several unique aspects to these loans, including the fact that there are three actual partners in the financial arrangement. They also have only fixed terms available, and all of them require the borrower to provide money down, although that can come from another loan, so long as it is not an SBA loan.

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Sba 504 Loan Structure

The structure of 504 loans is a bit complicated.;

The funding is serviced by 2 parties. If approved, youll essentially be getting 2 separate loans: 1 from a conventional lender, and 1 from the CDC backed by the SBA. Together, with a modest down payment, the 2 loans make up the total financing you need to get your project started.;

The breakdown is as follows:

  • Conventional lender: 50%
  • CDC: 40%
  • Down payment: 10%

There are some exceptions, however. CDCs are only allowed to contribute up to $5 million in funding for SBA loans.;

SBA restrictions dont bind lenders, however. They can provide 2-3 times that amount, which would throw off the previously noted percentages.;

Also, CDC loan percentages could go down in certain instances, with a higher down payment percentage required by borrowers. This would only apply in certain cases.;

Specifically, your down payment could be raised to 15% if your business is a startup or the real estate youre financing is considered special-use property . If both factors apply, your down payment requirement would be at least 20%.

Specific Sba 504 Loan Qualifications

What is an SBA 504 Green Loan?

You must also meet specific SBA 504 loan qualifications. Start by having a sound plan in place that proves the funding is a smart investment for both you and the SBA. You must demonstrate that a loan will help you grow and create jobs.;

If approved, your business must create or retain 1 job for every $65,000 that is guaranteed by the SBA debenture on the CDC loan . Seventy-five percent of these jobs must be kept within your community, meaning you cant outsource these jobs and must promote local economic growth.;

You may get around the job-creation requirements if the funding will help your business meet other community development and public policy goals, including but not limited to the following:

  • Diversifies, improves or stabilizes the local economy
  • Promotes the development of other local businesses
  • Expands opportunities for women, minorities and veterans
  • Upgrades or remodels facilities to meet health, safety and environmental regulations

You must provide the lender and the CDC with a strong proposal on how youll reach these goals to be considered for the SBA 504 loan program. Failure to show a plan that will result in a win-win for the SBA and your business will likely result in the rejection of your SBA 504 loan application.

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Collateral Is Tied To Your Project Or Purchase

Generally, SBA 504 loans are backed by the property, equipment or machinery you purchase with the loan. Typically, the third-party lender gets a first lien position meaning if you default, it can sell off your assets to collect the amount you owe first. The SBA usually takes a second lien position, meaning it would get access to your assets after your third-party lender collects whats owed. Other times, the SBA and third-party lender share a first lien position.

You dont need to provide any additional collateral or a larger down payment if your business meets the following requirements.

  • Its at least two years old. New businesses need to provide additional collateral on an SBA 504 loan.
  • It has strong cash flow. Businesses must regularly have enough money coming in to afford the loan repayments.
  • Your businesss management team must have proven experience with the type of project youre trying to fund if you want to avoid putting up more collateral.
  • The project is a logical extension of what your business currently does. In other words, your business needs to provide extra collateral if youre trying to break into a new field with a 504 loan.

The SBA requires all business owners to buy insurance to protect collateral against hazards and other risks.

Personal guarantee

Want To Put Less Money Down And Get Lower Interest Ratestake Advantage Of The Sba 504 Loan With Wbd

*For loans authorized and funded in Fiscal Year 2021

504 Loans Financing to help small businesses succeed!

An SBA 504 loan is a special product that can only be offered by a Certified Development Company in partnership with a local lender. WBD is one of the most successful CDCs in the country and has partnered with hundreds of local lenders to help thousands of small businesses since 1981.

The 504 loan is designed to help small businesses grow and create jobs by financing fixed assets like real estate and equipment. This program is best suited for projects from about $250,000 – $20,000,000.

Qualified borrowers can look forward to:

  • Long terms
  • Low, fixed rates
  • Lower down payments

One of the greatest advantages of this 504 program is that it helps get financing deals done that conventional lenders are hesitant to tackle alone. In addition to the favorable terms for the borrower, partnering with WBD also reduces risk for the lender as well.

If all of this sounds good, take three minutes to view the What is a 504? video to learn more about how this powerful program works.

Yes, the SBA 504 program is a government program, but WBD is here to handle all of the interactions and paperwork with the SBA on your behalf.

Smart business is knowing all of your options, so take the time to learn about the 504 program when it is time to seek financing for your business.

Give us a call to learn more or get started.


Contact WBD:

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Sba 504 Loan Structure And Limits

The 504 is most often used with another loan so that large projects can be achieved. Generally, the borrower will supply 10 percent of the total cost of the project. The SBA 504 loan would cover 40 percent of the project, and the last 50 percent is covered by the loan from a traditional lender.

If you think about the SBA 504 vs the 7, the 504 is a larger loan. The minimum 504 loan amount is $125,000, and the maximum is between $5-5.5 million, at the discretion of the SBA. The benefits for large commercial real estate is clear, as the 504 has a fixed interest rate and requires a fixed 10% down from the borrower. For land and real estate, the 504 has a 20 year term.

Also, the SBA 504 loan is offered by Certified Development Companies rather than by banks or other lending institutions. There are about 260 CDCs across the United States, and your local CDC office will be able to give you more information about borrower eligibility, down payment requirements, and anything else related to the SBA 504 loan.

Sba 504 Loan Companies

What is a SBA 504 Loan?

There are a limited number of SBA-approved CDC lenders who can make these loans. In addition, there are non-CDC lenders who partner with CDCs to make these loans.These three lenders have a good reputation for making the SBA loan application process simple, however, and are accustomed to the cumbersome paperwork and documentation requirements that 504 financing requires. Since they do SBA loans often, they can guide you through the process and help you avoid common pitfalls when putting your application package together.;

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Sba 504 Loans: What Businesses Qualify And How Do They Work

Small businesses have a range of loan options to choose from. They could opt for small business administration loans, merchant loans, or startup grants, to name a few. One of the most popular types of loans on offer is a 504 loan. These are designed to provide funding for the purpose of purchasing fixed assets. In this context, fixed assets could imply investments in real estate, machinery, or other types of equipment with a long life.

Why Is Refinancing A Good Idea

As if opening up working capital isnt enough, refinancing existing debt can make good sense for a number of other reasons, including:

  • Being able to lock in below market rates on the debt
  • Being able to get out from under balloon payments
  • Being able to get out from under high interest rate loans
  • Being able to use the proceeds to hire more staff
  • Being able to finance business expense and save cash for mission-critical considerations

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Fees And Various Other Disclosures

Q.;Are there any origination fees associated with the SBA 504 Loan Program?A.;Yes, there is an origination fee on a SBA 504 Loan. The origination fee is equal to 1.50% of the net Debenture amount that is in most cases 40% of the total project cost. The fees are included in the loan you receive and cannot be paid out of pocket.

Q.;What are debenture soft costs?A.;Debenture soft costs are fees associated with the SBA 504 loan. These costs include the origination fee of 1.50%; the funding fee of ¼ of 1% and the underwriters fee of 1/2 of 1%. These fees are financed into the project and paid from the loan proceeds at the time the loan is funded.

Q.;What are miscellaneous billings?A.;Miscellaneous billings are charges against the application deposit account. These billings reimburse PPRDC for expenses incurred during the course of its activities.

Q.;What is the interest rate under the SBA 504 Loan Program?A.;The interest rate under the SBA 504 Loan Program is set at the time the Debenture is sold to the private investor. The interest rate is typically tied to the ten-year Treasury bond rate. The spread over the Treasury bond rate is roughly 2%.

Q.;Is there a pre-payment penalty under the SBA 504 Loan Program?A.;Yes, there is a pre-payment penalty during the first half of the term on a SBA 504 Loan. The penalty begins at the note rate and decreases by 1/10 each year until it is zero at the end of the tenth year.

Sba 504 Loan Pros And Cons

What is an SBA 504 Loan? — Low down payment for Commercial Real Estate

Their most notable perk is that, if you qualify, you can access higher loan limits at a lower cost when compared to many conventional loans.

A major drawback of the program, however, is that a large loan requires more documentation and a better credit rating than smaller loans. Theres also a long time between your initial application and final loan closing. Its not quick money, and its not available for most non-profit corporations.

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Financing Your Future Projects

PetroCal Associates is 100% committed to helping you finance and refinance your projects. You can count on us to continue to serve you and your financial needs, regardless of the current climate.

This new information from the SBA will allow borrowers to take advantage of this phenomenal loan program when they couldnt previously. Were here to help you do so or to finance new projects. Please call or email us to discuss what financing options are available to you.

Why Is The Sba 504 Loan Right For You

An SBA 504 Loan is a powerful tool to help your business grow. It offers:

  • Low Down Payment – Conserve working capital
  • Competitive, Fixed-Interest Rate – No future interest rate fluctuations
  • Long-Term – Brings debt service in line with cash flow generated by the asset
  • Improve Collateral Position – To increase borrowing capacity at lower rates
  • Refinancing – In certain circumstances, refinancing of existing debt related to fixed assets

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