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What are the eligible uses of an SBA 504 loan?
The purpose of the SBA 504 loan is to finance long-term fixed assets, primarily owner-occupied commercial/industrial real estate and capital equipment. Please see the full list of eligible uses.
How long does it take to obtain approval for a 504 loan?
Despite the bad reputation that an SBA Loan takes forever to get approval, SUCCESS CAPITAL’s SBA 504 loan approvals do not take any longer to be approved than conventional commercial real estate loans, many times we are approved prior to the Bank’s loan approval. However, timing depends largely on the borrower, those with complete information and documents will see their loan application package underwritten relatively quickly. We recommend that you bring us into the process early to discuss project timing and any potential issues. We prefer escrows to be 60 days or more, mainly due to the length of time in which it takes to receive appraisal and environmental reports.
What are the 504 loan program benefits?
Overall, with a 504 loan you have more control over the destiny of your company. Specific benefits include:
- Up to 90% financing. This helps preserve working capital.
- Fixed-rate financing. You can lock in occupancy costs for a generation.
- Below-market rates. This lowers your monthly payments.
- Long terms. We offer 20-year, fully amortized financing with no balloon payments.
- Ownership options. You choose the structure that maximizes the benefits to you and your company.
- Benefits of property ownership. Build equity in your business, stabilize rent payments, maximize tax benefits, and plan for retirement.
- 504 loans are assumable.
How are SBA 504 projects structured?
Success Capital partners with lenders to provide up to 90% financing. The borrower pays 10% of project costs using cash, equity in the land or building, and/or prepaid project-related expenses. Down payments of 15% to 20% are required for new businesses (less than 2 years old) and/or purchase of special-use facilities (see our list of special use facilities). A bank or other institutional lender provides a first lien loan for 50% of the project cost. Success Capital provides a second lien loan for 40% of the project cost.
What are the general rules for the project structure?
The first mortgage must be equal to or greater than the 504 loan. The 504 loan may not exceed 40% of the total project cost. The borrower’s injection must be at least 10% of the total project cost (or 15% to 20% if a start-up and/or special purpose facility). No more than 50% of the project costs can come from federal sources.
If the loan is for a special purpose building, the bank’s loan percentage will never be lower than 50% because any increase in the down payment must reduce the SBA loan and not the bank’s loan. (For example, on the special purpose building purchase the borrower puts 15% down, SBA loan then is 35% of the project, and the bank loan is 50%)
How big can a project be and still qualify for an SBA 504 loan?
There is no limit on project size. The 504 loan can finance as much as 40% of the project cost, not to exceed $5 million (or $5.5 million for manufacturing companies and for projects that conserve energy or produce renewable energy).
Can a business be too large or successful for an SBA 504 loan?
The business and any affiliated entities combined must have a tangible net worth of less than $15 million, and 2-year average after-tax profits of less than $5 million. Other size standards may be utilized if necessary. Please contact our office for details.
What are the rates on the 504 loan?
The rate is fixed for the term of the loan at the time of the 504 loan funding. The rates are market-determined. The 20-year loans are typically priced at the 10-year Treasury rate plus a spread of 2.5% to 3%. The 10-year loans are typically priced at the 5-year Treasury plus 3% to 3.5%. Scroll to the bottom of this page for current rates.
What are the terms of the 504 loan?
504 loans are fully amortized for 20 years for real estate and 10 years for capital equipment/machinery. A 10 year fully amortized loan for the purchase of commercial real estate may be requested by the borrower, so long as the company’s cash flow can support the much shorter term.
What types of businesses are eligible for SBA 504 financing?
To qualify for a loan, a business must be an operating, for-profit business located in the United States and organized as a corporation, sole proprietorship, partnership, or limited liability company. Most business will be eligible. See our list of ineligible businesses.
Are there any other specific requirements for an SBA 504 Loan?
The owner-user of the project being financed must occupy at least 51% of the property for the term of the loan if an existing building or 60% to start for ground-up construction (increasing to 80% within 10 years). Additional requirements include participation by another lender who finances up to 50% of project costs, and satisfactory credit history.
How much are the fees for the 504 loan?
Origination fees are 2.65% of the 504 loan, plus a $2,300 loan closing fee. These fees are
financed with the overall project, not paid out of pocket. Please note that the bank making the 50% first mortgage loan also pays an SBA fee of 0.50% of the first mortgage loan amount. This fee is usually passed on to the borrower.
What are the loan terms for the participating lender?
The first mortgage must have a term of at least 10 years when the 504 loan is for 20 years; and at least 7 years when the 504 loan is for 10 years. Interest rates and fees must be considered reasonable. The lender loan cannot have an early-call feature or contain any demand provisions unless the loan is in default. The lender loan must not be open-ended. The bank will also charge a 0.50% third-partly lender participation fee on their loan, which is paid to SBA prior to the SBA loan closing.
Who can participate as a third-party lender in an SBA 504 loan?
Banks, savings and loan associations, credit unions, pension funds, insurance companies, commercial lending companies, taxable industrial revenue bonds, and individuals participating as a lender.
What are the terms, rates, and fees on the bank’s first mortgage?
The bank loan will carry market rates and terms and may be structured as a fixed- or variable-rate loan. Success Capital may prepare a complete loan proposal summary for project costs, including all terms, rates, and fees; however, it is up to the borrower to negotiate the first mortgage rates and terms with the bank.
Will I need to pledge my home as additional collateral?
No. In the majority of projects, the project property being financed will be the only collateral securing the 504 loan. Additional collateral is required only when there is a deficiency in the appraised value of the project property or when there is a need to mitigate a credit risk.
Is an environmental report required?
Yes. The amount of the loan and prior use of the property will determine the type of report needed. Generally, a records search with risk assessment, or Phase I, is ordered. Success Capital will work closely with the lender to ensure that the appropriate environmental report is obtained.
What are SBA’s requirements for appraisals?
Projects that exceed $250,000 require an appraisal report prepared by a state-licensed or state-certified appraiser and in compliance with Uniform Standards of Professional Appraisal Practice. View the SBA requirements and regulations.
Can I get a pre-qualification for the purchase of a property?
Yes, if you would like to receive a pre-qualification contact our office for more information.