What is the SBA 504 Loan program?
Provides businesses with loans that are:
long-term,
below-market,
fixed-rate,
subordinated
For the purposes of:
purchase real estate,
build,
expand,
renovate
make leasehold improvements to buildings
purchase machinery and equipment
The program helps businesses preserve working capital by requiring only a small cash down-payment.
The purpose of the 504 loan program is to create or retain jobs in growing small and midsized firms.
Who Issues the SBA Guarantee and What does the Loan look like?
A Licensed SBA Lender provides 504 financing by issuing an SBA-guaranteed debenture for up to 40% of the total cost of a project.
A commercial lender provides financing for at least 50% of the project.
The borrower provides the remaining 10% in the form of equity or subordinated debt.
For new businesses and some special purpose buildings, the minimum investment from the borrower increases to 15% or 20%.
What are the Eligible Uses of Proceeds?
Proceeds of the financing package may be used for:
1. purchase of land, purchase or construction (or renovation) of a building; modernization, renovation, including leasehold improvements;
2. purchase of machinery and equipment [minimum useful life of ten (10) years];
3. related soft costs such as construction period interest and professional fees for accountants, engineers, lawyers, appraisers, etc.
The 504 program financing may not be used for working capital, or to acquire property
for purely investment purposes.
What are the Terms?
Machinery and equipment may be financed with ten (10) year 504 debentures and real estate with twenty (20) year debentures.
A minimum of seven (7) year financing is required from the commercial lender for machinery and equipment and ten (10) years for real estate.
What is the Interest Rate?
The interest rate on the 504 financing is fixed and is based on the prevailing rates for five (5)
and ten (10) year U.S. Treasury issues (for ten and twenty year 504 loans respectively), plus a spread of approximately
Is Collateral required? -
Collateral is usually limited to a second lien on the fixed assets being financed.
The commercial lender has the security of a first lien on the assets financed.
Are Personal Guarantees required?
Personal guarantees are required of those persons owning 20% or more of the business or the
property financed with the Section 504 loan.
When is Repayment?
SBA 504 loan repayment begins on the first day of the month following SBA’s funding. SBA 504 loans are self-amortizing with level monthly repayments.
A prepayment premium is required of 100% of the borrower’s interest rate the first year, and declining 10% per year then-after for 20 year loans and declining 20% per year then-after for 10 year loans, however because of the advantageous terms, few 504 loans are prepaid. The prepayment premium occurs only in the first ten years of a 20 year loan, and only in the first five years of a 10 year loan.
Are there Occupancy Requirements?
The business must occupy at least 51% of the building being purchased or renovated immediately upon acquisition and/or completion of renovations.
If constructing a new building, the business must occupy at least 60% of the space upon
completion of construction and may lease out the remaining 40%.
American Enterprise Funding Group
2903 Sloane Circle - York, PA 17404
Email: kfriedrich@ae-funding.com
Office: (717) 459-1100 - Fax: (717) 292-4410
