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%.
*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 TermsSBA 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 balloon 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.
CollateralThe 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 PaymentsAll 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.
SpecificsThe SBA 504 loan program structure is straightforward. A bank or third party lender is in a first lien position and provides 50 percent of the project cost. The SBA – through a Certified Development Company (CDC) – is in a subordinate lien position and provides up to 40 percent of the project cost. The small business borrower injection is between 10-20 percent depending on loan specifics.
If the project involves a special purpose building or if the borrower is a startup company, the down payment increases by 5 percent increments. For example, if a loan is for a single-purpose building and the company is a startup, the borrower injection rises to 20 percent. Collateral is typically project specific which leaves working assets available for future credit needs.
There are virtually no restrictions on the bank’s loan with respect to structure or pricing. Rates can be fixed or floating. In fact, the pricing on the interim or bridge loan can be structured to reflect the greater risk during the construction phase. The only stipulation as part of 504 project financing, is that the bank’s loan must be for at least 7 years for a 10-year 504 equipment loan and at least 10 years for a 504 real estate loan. The bank does its own underwriting and sets its own terms, interest rates and fees. There is a one-time fee of 0.5 percent of the bank loan that is paid to SBA as a program participation fee.