504 Loan Underwriting Considerations

These are the top five questions we ask when we are looking at financing a particular 504 loan request. If you have a client that fits the program but falls short in answering these questions give us a call and we will be glad to work through underwriting the loan on a case by case basis.

How well can the business cash flow debt?

• Cash flow coverage is the single most important criterion in getting a loan approved.
• Plus 1: 1 debt coverage in existing financials is a great way to start.
• We can underwrite on financial projections if they make sense and fit the business model.How strong is the company’s balance sheet?

How strong is the company’s balance sheet?

• We want to see business owners that are invested in their businesses.
• We want to see a post project pro forma debt/worth ration 6:1 or less is considered very good; we can go higher but we will need compensating factors.

What are the company’s operating trends?

• We like to see solid growth or the potential for growth.
• We do not like to see a company relying on just one or two business clients for revenue, the more the better.
• We are looking for a solid accounts receivable and accounts payable by the business indicating good strong business health.

How strong are the company’s owners?

• We like to see some net worth outside of the business.
• Solid credit is important and credit must be acceptable.
• Borrowers must show that they have their down payments seasoned and sourced.

How solid is the project collateral?

• We need to have an appraisal that equals project costs

If you have a question that you would like to ask concerning the SBA 504 loan program please use the form below

[faq ask SBA 504]

Common Questions Concerning SBA 504 Loans

What down payment is required for my project to get financed?

• 10% is required as the down payment. Funds should be seasoned and sourced.
• Special Use properties will require an additional 5% extra and we will help you determine that.
• Any new business will require 5% extra.

How do I know if my project is considered a special use project?

• Best way to determine is can your property be used for multiple purposes? If not, then its considered Special use.
• A car wash, a restaurant, funeral home are examples of special use properties.
• When in doubt an appraiser can normally determine.

What is considered a “new” business?

• Key criteria is ownership experience  and not the life of the business that is being financed.
• Experienced owners can get lower down payments if starting a new business unit in a field in which he/she has ownership experience.
• Inexperienced owners require higher down payments, even if acquiring an existing business.
• People with strong management experience  may qualify for a lower down payment when starting a new business if they hard profit and loss responsibility over a comparable business.

How many jobs am I required to create by using an SBA 504 loan?

• 1 job within the first two years of completion for every $50,000 of SBA financing.
• Waivers do exist for public policy goals; minority owned; women-owned; veteran owned and rural locations are major qualifiers.

Can my business be too big for a 504 loans?

• Maximum net worth of the business should be less than or equal to $7.5 million.
• Average net profit after taxes for any business should be less than or equal to $2.5 million.

Can my business not be eligible for an SBA 504 loan?

• Standard SBA exceptions include finance companies, speculative mining, gambling establishments, etc.
• Some franchise businesses are ineligible for financing because they are overly controlled by the parent corporation which is  common among insurance agents, real estate agents, and financial advisors.

What are the requirements for owning a building with an  SBA 504 loan?

• If acquiring an existing building, the owner can lease up to 51% of the property.
• If the owner is building a new building, the owner must occupy 60% at completion and can lease out an additional 20% for 5 years but then they must occupy 80% the building and can only lease out 20% during the life of the SBA 504 loan.

If you have a question that you would like to ask concerning the SBA 504 loan program please use the form below

[faq ask SBA 504]

SBA 504 Project Structuring Guides

You ready to submit a 504 loan request but before you do use our project structuring guide as a valuable resource.

Hard costs for fixed-asset acquisitions that are eligible with a 504 loan:

• Land
• Acquisition of land and existing building
• Construction and upfit
• Eligible equipment: 10 year useful life, no rolling stock

Soft costs that can be included in an SBA 504 loan are:

• Design Fees
• Appraisal
• Environmental review
• Closing Costs
• Lender Origination Fee
• Interest during construction/interim period
• Contingency reserve (as needed for project)

What exactly is an “equity injection” in a 504 loan?

• Cash invested by business owner is standard source of down-payment
• Owners cannot pledge outside collateral, i.e, lien on vacation home-in lieu of investing cash into the project
• Owners can count previous expense on project, i.e., land down payments and initial architectural drawings–toward the needed down payment.
• If owner has owned project land or building for 2 years or more, the 504 loan program can use the existing appraised value as “base” value for project structure

Typical Limitations for a CDC in a 504 loan program:

• $1.5 million 504 loan maximum for most customers
• $2 million maximum for customers that meet SBA public-policy goals
• $4 million maximum for manufacturers
• They must factor in any other existing SBA debts in determining maximum eligibility of any one borrower

If you have a question that you would like to ask concerning the SBA 504 loan program please use the form below

[faq ask SBA 504]

Conventional Loan vs SBA 504 Loan

SBA 504 Typical Loan Structure

A bank or other lender finances 50% of the project cost and takes a first mortgage (lien) position on the assets financed.  The CDC, through the SBA 504 loan, finances 40% of the project cost up to a cap and takes a second mortgage position. The borrower then contributes a downpayment of as little as 10%.

Typical Project

When you compare a typical bank loan vs the SBA 504 loan you will notice that the conventional bank loan will require an additional $226,500 in order to do the same loan. By using the SBA 504 program a business owner will get the best terms possible with the lowest down payment.  Please note:  an additional 5% down payment is required for certain projects like special purpose buildings (ie. car wash, hotels) or for start up businesses.  For both a new business and a special purpose building, the down payment is 20%.   The seller can provide the 50% permanent financing but, under current regulations, the seller must be co-equal to or subordinate to the SBA 504 loan. The 50% first mortgage can come from a variety of nonfederal sources such as banks, nonbank institutions or government agencies.

Typical Rates and Terms

SBA 504 loans are for terms of either 10 or 20 years.  The interest rate on the SBA 504 loan is set when the SBA sells the bond (debenture) to fund the loan, and the interest rate is then fixed for the duration of the term.  The small business owner’s monthly payment includes program fees and a loan loss subsidy fee which are financed as part of the loan.    SBA 504 debentures are fully amortized securities and have no baloon payments. There is a penalty for prepayment during the first half of the loan term on an SBA 504 loan.

Collateral

The SBA takes a subordinate (second mortgage) to secure its 40% portion of the financing and takes a security interest in assets financed.  Other assets of the business or principals are generally not required. (unless the company is a startup or the credit is unusually risky or the asset being financed is considered a single purpose asset or doesn’t appraise high enough).

Fees and Payments

All of the fees on an SBA 504 loan are added to the loan amount so they are amortized over the loan term and do not represent any “out of pocket” expenses for the small business owner.
Payments on the SBA 504 loan are made by ACH debit from the small business owner’s designated checking account on the first of each month after the loan closes. Payments on the SBA 504 loan are separate from payments on the 50% first mortgage loan.