The SBA 504 Loan Program was created by Congress as an economic development finance program to create jobs. The 504 loan provides long-term, fixed rate financing for small businesses who are acquiring or improving fixed assets. Great Lakes Asset Corporation partners with private lenders to finance the project. Borrowers benefit from a lower down payment, lower interest rates, and longer terms.
How can the SBA 504 loan be used?
504 loan proceeds can be used to finance: land and improvements; construction of a new building or purchase of an existing building; machinery and equipment (with a useful life of 10 years or more); interim construction interest and contingency costs (not to exceed 10%); and professional fees associated with the project (environmental studies, architect fees, etc.). Click on Use of Proceeds tab (above) for more information.
Can I lease part of my building to a tenant?
Yes; however, for a project to be eligible for SBA 504 funds the small business borrower must occupy at least 51% of an existing structure and may lease out the remaining 49% indefinitely. If it is a newly constructed building, the borrower must occupy 60% of the building immediately, will lease no more than 20% of rentable space long term, will occupy more than 60% of space within 3 years and plans to occupy at least 80% of rentable space within 10 years.The SBA now allows self-storage businesses as an eligible business type. How much money can I borrow?
Typical 504 loans range from $250,000 - $5,000,000; Manufacturing loans and energy-efficient loans may qualify for up to $5,500,000 in SBA 504 loan funding. Is my business eligible for a 504 loan?
To be eligible for a 504 loan your business and affiliates must have a net worth under $15,000,000 and a net profit (after taxes) under $5,000,000. Applicants must also be located in the United States, and be organized as a "for profit" business.
A personal resource test is completed on all applicants with more than 20% ownership. Applicants must not have liquid assets (cash, cash value of life ins., negotiable securities) of more than 1 to 2 times the total project costs.
Does GLAC provide all the financing?
No. Typically, GLAC finances 40% of the project, and a private lender finances 50%. The remaining 10% comes from the borrower in the form of cash or equity.
Does the borrower ever contribute more than 10%?
Yes. The borrower may be required to increase the equity contribution by 5% or 10% (reducing GLAC 's loan) if the real estate is deemed single purpose (e.g. bowling alley, gas station, nursing home, etc.), or if the business is new or the borrower is new to the business.
Do I need to secure the loan with collateral?
Yes. The SBA 504 loan is secured with a lien on real estate and equipment assets of the project being financed. Any person who owns or controls 20% of the interest must personally guarantee the loan. In some situations, owners with less than 20% ownership may be required to supply a limited guarantee. Life insurance assignments are also taken in some cases.
Are there prepayment penalties?
Yes. There is a declining prepayment schedule during the first 10 years of a 20 year loan. In the remaining 11-20 years there are no prepayment penalties. There is also a declining prepayment schedule during the first 5 years on a 10 year loan. In the remaining 6-10 years there are no prepayment penalties.
What are the associated costs and fees of a 504 loan?
A $2000.00 deposit is payable at the onset of your loan application. This deposit is applied to the fees associated with the preparation of your application (e.g. credit reports, certificate of good standing, etc). This deposit (less the aformentioned expenses) will be returned when your debenture sells. If the loan application is cancelled or the debenture does not sell, the deposit will not be returned.
An initial deposit of $1500.00 for legal fees is also required. This deposit less expenses (e.g. filing fees, documentation preparation, etc.) will be returned upon the sale of the debenture. If the debenture does not sell the deposit will be used for legal fees incurred.
Since the SBA 504 program does not rely on taxpayers' dollars, the borrower must incur the the following administrative fees associated with the loan:
Closing fees (approximately 2.75% of the 504 loan)
Attorney closing fee of $2,500
Servicing fees (approximately 1.66% of the 504 loan)
These fees are rolled into the loan so that there are no additional out-of-pocket expenses.
Is the 504 loan assumable?
Yes. If you sell the real estate, the new buyer may assume the 504 loan with the same terms and conditions (based on qualifications).