Government Guaranteed Lending

Small Business Administration 504 Loan Program

One thing that most small businesses have in common is the need for long-term financing at affordable fixed rates. This is exactly what the Small Business Administration (“SBA”) had in mind when they designed the SBA 504 Loan Program. At SoCal Mortgage Company our goal is to develop your application package, select the best lender for your loan, and deligently work toward closing your SBA 504 loan.

The SBA 504 Loan Program is a partnership between SoCal Mortgage Company, Certified Development Company (“CDC”), acting on behalf of the SBA, and the business owner. Under the SBA 504 Loan program, SoCal will find a bank lender for 50% or more of the total project cost, the SBA/CDC will provide a minimum of 40% of the total project and the business owner will generally provide a minimum of 10% of the total cost.

Program Description

The United States Small Business Administration (SBA) enables growing businesses to secure long-term, fixed-rate financing for commercial / industrial real estate and/or major machinery and equipment through the SBA 504 Loan Program. The program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, including land, buildings, and major machinery and equipment. The 504 Program gives small business owners access to the same low-cost, fixed-rate, long-term financing that larger businesses might obtain through bond markets.

Below is a summary of the SBA 504 loan programs key points:

Used for the purchase of commercial real estate and other fixed assets, refinance commercial debt.

20 to 25 year fully amortized commercial loan

Fixed low interest rate for the SBA 504 portion of the commercial loan

The loan can be up to 90% Loan to Value

Loan amounts up to $15,000,000.00

The SBA portion of the loan is both assumable and transferable

The SBA 504 loan program has been used by thousands of businesses to maximize their growth and potential through the acquisition of commercial property.

Benefits

There are numerous benefits to the Small Business Association 504 Loan Program for a Small Business including:

• Longer terms for repayment of your loan request.
• Lower loan payments.
• Improved cash flow.
• Lower collateral requirements.
• With the SBA guaranty, we are  able to lend money to businesses that would typically not qualify for conventional bank financing
• Low down payment
• Below market fixed interest rates on the SBA portion of the loan
• Loan fees can be financed
• Loan is assumable

Use of Proceeds

Under the SBA 504 Loan Program businesses can use the loan proceeds for the following uses:

• Purchasing or refinancing a commercial property, refinance commercial debt.
• Construction financing, including, modernizing, renovating or converting existing facilities
• Purchasing machinery and equipment with a useful life of at least 10 years.
• Unfortunately, the SBA 504 Loan Program cannot be used for working capital or inventory, consolidating or repaying debt.

                                           Terms, Interest Rates & Fees

SoCal Mortgage will arrange the best rates and terms on the first trust deed, and work closly with SBA/CDC.  Some of the clients options, arranged by SoCal Mortgage, for a first trust deed include fixed and variable interest rates. The conventional loan payments are usually based on a 25 year amortization, the SBA/CDC loan is always based on 20 years fully amortized with a very low fixed rate.

Interest rates on the second trust deed portion of the 504 loans are fixed at the time of the debenture sale. The interest rates approximate the current market rate for five- and 10-year U.S. Treasury issues, plus a small increment. Maturities of 10 and 20 years are available.

Fees total approximately 2.50% of the debenture and are financed into the loan amount.

Eligibility

To be eligible, a business with its affiliates must be operated for profit and fall within the size standards set by the SBA. The business must also have a tangible net worth of $7 million or less and an average net income of $2.5 million or less after taxes for the preceding two years. The business applicant must be the primary tenant and occupy at least 51% of an existing facility. Passive investment companies, non-profit businesses, lending institutions, real estate development companies, and some other enterprises are not eligible for 504 loans. 

Loan Structure

An SBA 504 Loan Program contains the following three parts:

1. First Mortgage- A First Mortgage Loan will be arranged by SoCal Mortgage for at least 50% of project costs. 
2. Second Mortgage- A Second Mortgage Loan from a Certified Development Company and the SBA, of up to 40% of the project cost or a maximum of $2,000,000 (under special circumstances, up to $4,000,000 is available).  The term of the 504 loan can be as long as 20 years for real estate and 10 years for equipment. The interest rate is fixed for the maturity period. The interest rate is below market, fixed and determined at the time of SBA funding.
3. Borrower Injection - A down payment from the borrower is typically 10% of total project cost. If the business is a new business or the facility is for special usage, the required down payment may be as much as 20% of total project cost. The down payment can be cash, equity in land or building, existing equipment or any other fixed assets that are part of the project.

Sample Project

Purchase of a commercial building for $1,000,000. A SBA 504 Loan would like the following:

Lender	Amount	% of Project	Terms	Interest Rate	Collateral
Bank	$500,000	50%	25 years	Market	1st Trust Deed
SBA/CDC	$400,000	40%	20 years	Fixed	2nd Trust Deed
Borrower	$100,000	10%
TOTAL	$1,000,000	100%

 

Collateral

A SBA 504 loan is secured by a lien on the project assets being financed. In addition, personal guarantees of all principals owning more than 20% of the company are required. No additional collateral is usually required.                                                             

                                                             Fees

Most of the up front fees associated with the 504 Loan Program are included in the loan. However, there are various professional service fees for items such as appraisals, environmental testing and processing fees which are paid by the borrower. All fees are generally added to the 504 loan. While these fees add to the borrower’s cost, the overall result is still a lower interest rate than normally obtainable through conventional financing.

Prepayments

The bank loan generally can be prepaid according to terms of the lenders Commercial Lending note. The SBA 504 loan may be prepaid, but it must be prepaid in full and there is a declining prepayment penalty during the first half of the term.

Power Wholesale Electric--recently Closed SBA Loan for the purchase of a 12,000sf industrial building located in Rancho Dominquez.

Becaues we act as a broker/advisor we are able to best determine which commercial lender is well suited for your individual SBA situation. SoCal Mortgage has lending relationships established with most of the major lenders for commercial real estate. Each lender is different and each lender has their own particular underwriting standards and favorite property types. We know which lender will give your potential SBA loan the best chance of approval and funding.

Still have questions? Please contact Mike Richardson us anytime! We look forward to hearing from you.