What are the Advantages of the 504 Loan?
- Long-Term below market Fixed-Rate financing
- Equity requirement as low as 10% – preserves working capital
- Lender can provide 90% financing for borrower
- Lender can participate in larger transactions
- Lender in first lien position - 50% loan-to-value allows more opportunity to get a project completed
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What is a typical Loan Structure?
The Lender makes a loan in the first trust deed lien position for 50% of the total project. Capital CDC issues a loan in the second trust deed lien position for 40% of the total project. Borrower contributes 10% of total project. Loan packaging is handled by Capital CDC.
Percentages refer to Total Project Costs
15% contribution if project is a start-up or single-purpose building.
20% contribution if project is a start-up and single-purpose building.
* Start-up: businesses in operation less than 2 years.
EXAMPLE PROJECT
SOURCE |
Percentage |
Project Amount |
Bank Loan |
50% |
$500,000 |
CDC/SBA |
40% |
$400,000 |
Business Owner |
10% |
$100,000 |
|
100% |
$1,000,000 |
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When would a Borrower’s Contribution Increase?
A Borrower’s Contribution will increase to 15% if…
- the business is considered a startup (usually a business operating for two years or less is considered a startup).
- or -
- the project being financed is appraised as a single-use facility (i.e. a business that will always be the same type business no matter the owner - examples: hotels, movie theaters, bowling alleys, etc.)
A Borrower’s Contribution will increase to 20% if…
- it is both a startup AND the project is appraised as a single-use facility (ex. A startup hotel project)
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How Much Can I Borrow?
Generally, up to 90% of the total project cost or appraised value of the property, whichever is the lesser amount. There is no limit on the bank portion of the loan. The SBA portion has recently been increased to the following amounts: up to $1.5 million for regular loans, up to $2 million for loans that meet certain Public Policy Goals, and up to $4 million for businesses qualifying as Small Manufacturers.
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What are Public Policy Goals?
SBA 504 is a community lending program designed to improve the locality. Eligibility requires either:
1) Job creation or retention (one job per every $50,000 borrowed from CDC
under SBA 504 Program – one job per every $100,000 borrowed from the CDC
for manufacturers);
- or -
2) One of the following public policy goals to:
- Revitalize a business district of a community with a written revitalization
or development plan
- Expand exports
- Expand minority business development (owned 51% or more by minority business
person)
- Aiding rural development
- Change necessitated by federal budget cutbacks
- Change required by mandated standard (re: health, safety, environment)
- Increase productivity & competitiveness (retooling, robotics, or modernization)
- Expand woman-owned business development
- Expand veteran-owned business development
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What are the Terms, Rates and Fees?
The lender’s portion is typically amortized over 20 to 25 years with a minimum term of 10 years or up to a maximum of 25 years. Rate term and fees are negotiable between the borrower and lender.
Capital CDC’s portion can be offered with two term options of 10 or 20 years fully amortized. The interest rate on a 504 loan is set at an increment above the current market rate for five-year and ten-year U.S. Treasury issues. Fees are approximately 2.75% to 3.00% of the loan amount. All fees are financed in the 504 Loan.
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How does a Small Business qualify for the 504 Program?
Most for-profit small businesses meet the basic size 504 eligibility requirements of:
- Business Net Worth not to exceed $7.5 million,
- average Net Profit after taxes for 2 consecutive years not to exceed $2.5 million, or
- the business may qualify under 7(a) size standards (manufacturers of 500 employees or less).
Other requirements include:
- 51% owner occupancy for existing building purchase, or
- 60% owner occupancy for new construction,
- if the project is equipment only, the equipment must have a minimum 10 year economic life.
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Who are Ineligible Borrowers?
- Non-profits
- Speculative development
- Lending institutions, insurance companies
- Gambling concerns and private clubs
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What are Ineligible Use of Funds?
- Refinancing
- Working capital
- Inventory
- Rolling stock
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Is it Difficult to Apply?
Not at all! When applying for an SBA 504 loan - as with any
loan - you are asked to fill out a standardized Application
and provide specific documentation. At Capital CDC, we provide a checklist to
simplify the process, will work with your accountant and lender, and do all
of the analysis, packaging, and SBA interfacing for you. Our role is
to keep the process easy for our borrowers.
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Is there a lot of paperwork?
The paperwork is comparable to that of any business loan. Loan Officers at Capital
CDC work with borrowers to help them complete the requirements and process the
application.
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Is my loan assumable?
Yes, SBA 504 loans are fully assumable, upon qualification.
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Can I refinance a building I already own?
No, unless the project includes an expansion of the building.
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Can my down payment be other than cash?
Yes, the down payment can also be in the form of the value of previously acquired land (which can include building(s), structures, and other site improvements that will be part of the project property).
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Can you recommend a good lender to use?
If you decide to use the SBA 504 Loan Program, Capital CDC can recommend a bank or lender to make the loan. Or we will work with any bank of your choice, wherever it is located.
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What if I am not ready to purchase a building yet, but just need some money to get my business started?
Capital CDC primarily focuses on commercial real estate loans, but we can recommend a lender that might be able to assist you. Feel free to contact us so we can hear about your project and discuss your options.
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What is the Turnaround Time?
Our experienced Loan Officers can provide you with loan pre-qualification in
just 1 business day. The complete procedure from application submission to disbursement
of funds takes approximately 2-4 weeks, depending on the complexity of the loan.
At Capital CDC, we serve our customers with professionalism,
honesty and expertise. We're extremely knowledgeable in the field, and try to
match our customers' financial needs and expectations to the most appropriate
program available.
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What is the First Step in Getting my Loan?
We will work with your current bank or help you identify a lender to participate
in the 1st trust deed portion of your financing. To speak with a Loan Officer
in more detail, submit some brief information on our Contact
Us page inquiry or call (800) 504-CCDC (2232).
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