How Financing is Structured:
A bank or other lender finances 50% of the project cost and takes a first mortgage (lien) position on the assets financed. The CDC, through the SBA 504 loan, finances 40% of the project cost up to a cap and takes a second mortgage position. The borrower then contributes a downpayment of as little as 10%.
Purchase building $800,000
Soft costs $50,000 (i.e. appraisal, architect fees, closing costs)
Total : $1,000,000
Bank - first mortgage $500,000 permanent loan (50%)
SBA 504 - second mortgage $400,000 permanent loan (40%)
Downpayment $100,000 (* 10%)
* An additional 5% down payment is required for certain projects like special purpose buildings (ie. car wash, hotel) or for start up businesses. For both a new business and a special purpose building, the down payment is 20%
The seller can provide the 50% permanent financing but, under current regulations, the seller must be co-equal to or subordinate to the SBA 504 loan. The 50% first mortgage can come from a variety of nonfederal sources such as banks, nonbank institutions or government agencies.
Rates and Terms
SBA 504 loans are for terms of either 10 or 20 years. The interest rate on the SBA 504 loan is set when the SBA sells the bond (debenture) to fund the loan, and the interest rate is then fixed for the duration of the term. The small business owner's monthly payment includes program fees and a loan loss subsidy fee which are financed as part of the loan. SBA 504 debentures are fully amortized securities and have no baloon payments. To compare interest rates, see the U.S. Treasury bond rates. Current SBA 504 interest rates and historical interest rates can be found by clicking here.
Note: There is a penalty for prepayment during the first half of the loan term on an SBA 504 loan.
The SBA takes a subordinate (second mortgage) to secure its 40% portion of the financing and takes a security interest in assets financed. Other assets of the business or principals are generally not required. (unless the company is a startup or the credit is unusually risky or the asset being financed is considered a single purpose asset or doesn't appraise high enough).
Fees and Payments
All of the fees on an SBA 504 loan are added to the loan amount so they are amortized over the loan term and do not represent any "out of pocket" expenses for the small business owner.
Payments on the SBA 504 loan are made by ACH debit from the small business owner's designated checking account on the first of each month after the loan closes. Payments on the SBA 504 loan are separate from payments on the 50% first mortgage loan.