The business must be operated for-profit. If purchasing a building, the small business must occupy at least 51% of the building. Loans cannot be made to businesses engaged in speculation or investment.
Typically an SBA 504 project includes the following:
The 504 loan program provides fixed rate financing for long-term, fixed assets. Eligible project costs include:
Project costs that are not associated with long-term fixed assets are not eligible. Examples include:
As an alternative, these types of project costs may be financed through the South Eastern Development Foundation or another third-party lender.
The maximum loan amount for the SBA 504 portion of the loan (up to 40% of the total project) is:
$25,000 - Assuming that this is 40% of the project cost, the smallest total project size that is able to be financed through the 504 program is approximately $60,000.
Loans are made for either 10 or 20 years. The 504 debentures are sold on the secondary market and interest rates are set at a fixed rate at the time the loan is funded. Interest rates are generally at or below the market rate. View current and historical rates.
Fees total approximately 3% of the debenture and are financed through the SBA loan. This fee includes a CDC fee of 1.5%, closing costs and an underwriting fee. There are no "out-of-pocket" costs for a borrower on the CDC portion of the loan. Dakota BUSINESS Finance's fees are built into the 504 debenture and are financed 100% by SBA over the 10- or 20-year period.
There is a pre-payment penalty on the 504 loan based on a sliding scale for the first 10 years on a 20-year debenture and the first 5 years on a 10-year debenture. Terms on the first mortgage are negotiated directly with the participating lender.
Generally, the project assets being financed are used as collateral. Personal guaranties are required from all principal owners of the business (with ownership of 20% or more and officers).
Generally, SBA is looking for good character, management expertise, and the commitment necessary for success. Adequate equity investment by the borrower in the business and sufficient funds to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase). Also, the ability to repay the loan on-time from the historical or projected operating cash flow is essential. A feasible business plan is imperative.
Dakota BUSINESS Finance will work with borrowers and the lender to complete the SBA loan application and other forms that need to be submitted to Dakota BUSINESS Finance and SBA. Contact Dakota BUSINESS Finance to set up a meeting to receive technical assistance.
New businesses are generally defined as those that are less than two years old. New businesses are required to make a 15% down payment (vs. 10% in a typical 504 program loan). SBA wlll only finance 35% of the project and the lender will provide 50% of the financing.
A "single purpose" building is one that could not be easily adapted for other general purposes without incurring significant expenses. In the case where the 504 program is being used to finance a "single purpose" building, the borrower has a mandatory 15% down payment. SBA will finance 35% of the costs and the lender will finance at least 50%. If the business is both new and for a "single purpose" building, the borrower's contribution must be 20% of the loan (SBA's will finance 30% of the costs, and the lender will provide 50%).
The SBA 504 Program allows for limited refinancing of existing debt as part of a new eligible SBA 504 project. The refinanced debt must have been for long-term fixed assets that would normally have qualified for the SBA 504 program had the program been used originally to finance the assets. The refinancing must be part of a new SBA 504 project (purchase of long-term equipment, purchase of an existing building, expansion or renovation of an existing building, and/or construction of a new building). The amount of debt refinanced is limited to 50% of the new SBA 504 project.