Applying for an SBA 504 loan can be a smart way to finance a business. With long-term, fixed-rate financing from the U.S. Small Business Administration (SBA) and approved lenders, it’s designed to help you get the funding you need for renovating or purchasing real estate for your business or for purchasing large equipment and machinery. Here is everything you need to know about the SBA 504 loan program – from qualifications and requirements to resources that can help with your application.
What is the SBA 504 Loan Program?
The SBA 504 loan program is designed to help business owners with long-term, fixed-rate financing for major assets such as real estate or large equipment/machinery. Through the loan program, the SBA partners with commercial lenders to provide financing that gives eligible borrowers access to up to 90 percent of their funds for these eligible purposes. It’s one of the most affordable ways for businesses to finance large projects without putting too much strain on their capital holdings.
With an SBA 504 loan, borrowers can receive funding for the purchase, renovation, or construction of owner-occupied commercial real estate. There are also options to use the funds toward buying large equipment/machinery and covering certain soft costs associated with the project. What makes the SBA 504 loan particularly appealing is its favorable terms, allowing smaller businesses to purchase assets they otherwise wouldn’t have access to. Plus, borrowers don’t have to be required to provide any additional collateral beyond the specific asset they are purchasing. The SBA 504 loan program remains one of the most attractive ways businesses owners and entrepreneurs can secure financing for their projects without breaking their budgets.
The 504 loan program is a unique offering from the Small Business Association (SBA). This low-cost financing option is partly funded by private lenders and the SBA, allowing borrowers to secure a longer term loan with a fixed or adjustable rate. Traditionally with government-backed loans, the interest rate depends on the prime rate at the time of issuing. However, for 504 loans, banks need only give their customers a maximum rate predetermined by their certification date. The long repayment terms allow even small businesses to access capital they wouldn’t be able to qualify for traditionally.
To be eligible for a 504 loan, the small business must have fewer than 500 employees and meet other SBA criteria. Loans are typically broken up into three parts: the bank holds 50 percent of the loan, a Certified Development Company (CDC) contributes 40 percent, and the borrower is usually responsible for 10 percent – these figures may vary from program to program. In total, businesses can receive financing of up to $5 million or more depending on their need, with maximum terms ranging from 10 to 25 years. With competitive rates and tremendous benefits for smaller businesses such as start-ups, this loan program offers an opportunity that traditional lending does not necessarily provide.
What Kinds of Businesses Qualify for the SBA 504 Loan Program?
To be eligible for an SBA 504 loan, businesses must make sure they meet certain requirements. Generally speaking, the business must operate with a for-profit purpose in the United States and cannot have more than 500 employees. The business’ tangible net worth must also not exceed $15 million and its average net income after taxes for either of the previous two years must not be higher than $5 million. Additionally, small manufacturing companies have their own set of eligibility requirements according to SIC codes.
With the SBA 504 loan program, businesses have access to long-term, fixed-rate financing for major fixed assets such as land and buildings. Businesses that do qualify can also use the funds to make renovations and construction improvements. The potential uses of an SBA 504 loan are vast; it can be used to purchase machinery and equipment, finance land development or renovation costs, pay off liens on existing properties, and even refinance existing commercial debt associated with the purchase of commercial real estate.
Generally, small businesses, agricultural cooperatives, and corporations owned by Native American tribes (or other qualifying organizations) who meet the SBA definition of size standards qualify for assistance with the SBA 504 loan program. The businesses must have a net worth under $15 million and average net income of less than $5 million over the two preceding years. Additionally, for-profit entities must conduct business in the United States to be eligible for the loan program. Other eligibility criteria vary from district to district and business to business, so be sure to check out all requirements before applying.
Some of the eligible activities that may receive funds from an SBA 504 loan include purchasing long-term fixed assets, such as machinery and equipment; commercial real estate; or purchasing and installing pollution control / energy efficient equipment. Businesses must prove they are creditworthy and be able to demonstrate stable cash flow in order to receive the loan. It’s important that businesses determine if they qualify for assistance before investing lengthy time resources into the application process. Borrowers must also understand that utilizing this program means a long-term commitment of 7-10 years.
Requirements to Get an SBA 504 Loan
To get an SBA 504 loan, the business must meet certain requirements including operating with a for-profit purpose in the United States, not having more than 500 employees, having a tangible net worth under $15 million and an average net income after taxes for either of the previous two years not exceeding $5 million. Additionally, small manufacturing companies have their own set of eligibility criteria according to the North American Industry Classification System (NAICS).
Businesses applying for a 504 loan must also be structured as a corporation, partnership, or proprietorship. Investors planning to start a new business can apply if they can demonstrate the potential to become profitable in a reasonable amount of time. Finally, the business must not have previously bought or modernized their building with any other SBA-backed loan and must meet all other criteria established by the U.S. Small Business Administration for its standard 7(a) program rules.
Additionally, to qualify for an SBA 504 loan, the company must have a net worth of no more than $15 million and average annual net profits of less than $5 million over the two preceding years. The owner must also have invested a significant amount into the enterprise, with at least 10% of the loan going towards their own equity. One last requirement is that businesses cannot be engaged in speculation or any other activity prohibited by law.
To qualify for an SBA 504 loan, the business must be classified as a ‘small business’ and have fewer than 500 workers. Additionally, the company must use the loan money only to purchase fixed assets such as land, machines or equipment, or buildings. It cannot be used to refinance existing debt nor can it be used for business restructuring or expansion. Furthermore, the requested amount must be no more than $5 million; however, larger amounts may be approved on a case by case basis.
To meet qualification criteria, the business must also prove it has sufficient cash flow and that it can repay the loan. The Small Business Administration (SBA) will review the applicant’s financial statements, credit report, capital contribution history, lease agreements, balance sheets and other necessary documentation in order to determine if they meet the eligibility requirements of an SBA 504 loan.
Understanding the Different Types of Loans
The SBA 504 loan program offers two different types of long-term loans: the CDC/504 loan for fixed asset purchases such as real estate and machinery, and the CAPLines loan for short-term working capital expenses. The SBA 504 fixed asset loans provides financing up to $5.5 million with a 10% down payment, while the CAPLines program can provide up to $5 million in financing with less of a required down payment. Knowing the differences between these programs is important when considering which one works best for your business.
The SBA 504 loan program’s fixed asset loans provide small business owners with long-term, fixed rate financing for the purchase of real estate, heavy machinery, equipment and other major fixed assets. This type of loan is guaranteed by both the Small Business Administration and a certified development company (CDC). The required down payment is typically only 10% of the project cost. Interest rates on these loans tend to be lower than they would be on other traditional forms of commercial financing due to their SBA guaranty. Furthermore, since these are long-term loans, they come with lower payments than short-term loans.
Besides fixed asset loans, the SBA 504 loan program also provides refinance loans for existing commercial real estate mortgages. These loans can be used to reduce monthly payments and/or lower the interest rate on an existing loan balance. The down payment requirement is typically higher than that of fixed asset loans, but it’s still considerably lower than with other types of traditional commercial financing. As with fixed asset loans, these refinancing options are backed by both the Small Business Administration and a certified development company (CDC). This type of loan tends to be more accessible and easier to qualify for than traditional small business loan programs because of their low down payment requirements and favorable interest rates.
The SBA 504 loan program can be a great asset for entrepreneurs looking to refinance their existing commercial loan balances. These low down payment loans provide up to 90% funding with some of the lowest interest rates available, allowing borrowers to free up cash flow and reduce their monthly expenses. In addition, they’re backed by the Small Business Administration, which further provides security and peace of mind. With such great benefits, entrepreneurs should make use of this financing option whenever possible.
How to Prepare to Apply for a 504 Loan
Before you apply for an SBA 504 loan, it’s important to take the right steps to prepare. This includes researching your financing needs and determining if the 504 program is best for you and understanding what documents will have to be submitted as part of the application process. You should also consider reviewing your credit score, getting a professional appraisal of any assets that you plan to purchase, and getting a written business plan together.
Once you have the materials needed to apply for a 504 loan, make sure that any information included is up to date, accurate, and honest. Pay particular attention to filling out forms correctly and double-checking your business financial information. It’s also important to get all required documents submitted in a timely manner so that your application process isn’t delayed by missing paperwork. Lastly, having an ESA Certified Development Company representative review your application thoroughly before submitting it can help ensure that you don’t miss any key elements.
In order to get approved for a Small Business Administration 504 loan, there are several documents you’ll need to submit with your application. These include the fee disclosure statement, certificate of eligibility, the executing lender’s loan authorization form, financial documents related to your business (e.g., personal and business tax returns and cash flow statements) as well as documentation regarding your ownership/management structure. You may also be asked to provide a personal financial statement or other credit-related information. Obtaining all of this paperwork before you start filling out forms can help make the actual application process significantly smoother and easier.
Furthermore, it’s important to review the SBA(Small Business Administration) eligibility requirements to make sure your business qualifies for the 504 loan. The business needs to be organized, and you need 53% or more ownership if it is a C-corporation, an LLC or any other type of organization recognized by the state. Additionally, you will need to show that your business is making an economic contribution in terms of job creation and/or public policy objectives. Finally, you will need to submit a 5-year business plan which outlines how you intend to use the loan proceeds as well as forecasted financials for years 1 through
In order to help you create an accurate business plan, the SBA requires you to complete a series of workshops as part of their pre-qualification program before applying for the 504 loan. These workshops will cover important topics such as budgeting, managing cash flow and understanding financial statements. There is also an e-learning course available which can be used as a guide on investments and financing in the current business environment. After completing the required courses, you will receive a certificate which must be included with your application when you submit it to the SBA local district office.