SBA 504 Loan Program

The Small Business Administration (SBA) 504 Loan Program provides healthy small- and medium-sized businesses with long-term fixed rate financing for the acquisition or construction of fixed assets. Projects are financed through a unique public/private partnership that involves private lenders financing 50 percent of project costs, the Michigan Certified Development Corporation (MCDC) covering up to 40 percent of project costs, and small businesses investing at least ten (10) percent of project costs. By taking a secondary collateral position on project assets, the SBA provides a “collateral cushion” for the primary lender and reduces the amount of equity normally required of the borrower.

The SBA 504 Loan Program is a “take out” financing program. The SBA offers an upfront commitment to finance a project. The participating private lender provides interim financing, advancing the full amount of project funds during the construction/acquisition period. After the project is completed, the SBA reimburses or “takes out” the participating lender by the amount of the original loan commitment. Michigan Certified Development Corporation (MCDC) loans are actually funded by the sale of 100 percent federally guaranteed debentures on the open market.

Criteria

The SBA 504 Loan Program is primarily designed to assist healthy, expanding businesses that have been in operation for more than two years. The following credit requirements apply to such businesses:

• Existing cash flow from business operations greater than debt service needed to pay both existing debt and debt resulting from the proposed loan
• Sufficient collateral to secure the loan. In certain instances, the SBA 504 Loan Program also may be used to finance start-up businesses (i.e. those in operation less than two years). However, such businesses must demonstrate the following:
• Qualified management with industry-related work experience
• Strong marketing plan backed by a thorough market feasibility study
• Access to an adequate amount of working capital
• Minimum 15 percent equity contribution

Projects involving a limited- or single-purpose building require a minimum equity contribution of 15 percent for businesses in operation for more than two years, and 20 percent for businesses in operation for two years or less.

Eligible Businesses
For-profit corporations, partnerships or proprietorships that meet the following small business size standards:

• Net worth of less than $7 million
• Average net profit for the past two years. In addition, the small business applicant must be the user of the fixed assets being financed

Ineligible Businesses

• Passive income and real estate companies
• Financial institutions
• Non-profit businesses

Eligible Purposes

• Purchase of land, building, machinery, and equipment
• Land improvements
• Renovation or major addition to existing buildings
• Leasehold improvements

Ineligible Purposes

• Working capital
• Refinancing existing loans or debt consolidation
• Venture capital
• Rolling stock such as cars, trucks, buses, or airplanes

Project Size
Projects in the $300,000 to $3 million range are preferred. However, in certain instances it may be possible to finance larger or smaller projects. Generally, the maximum dollar amount the SBA may contribute toward any single project or borrower is $1 million. However, this may be increased to $1.3 million for projects that help achieve a public policy goal.

Job Creation
Generally, the SBA requires a project to create or retain one new job for each $35,000 of debenture. However, projects with a high community impact and low direct job impact may be considered when achieving one of several public policy goals of the SBA.

Processing Time
The processing time necessary to obtain a full SBA 504 loan commitment ranges from 6 to 8 weeks. NOTE: SBA approval has been obtained within 3 weeks on occasion.

Loan Terms
The SBA 504 Loan Program offers two loan terms: 10 and 20 years. The loan term selected depends on the type of assets financed, with the requirement that the useful life of the assets must equal or exceed the loan term. The participating private lender’s loan must carry a minimum term of 7 years for projects involving machinery and equipment acquisition only, and 10 years for projects involving real estate financing.

Interest Rate
The rate on the SBA 504 portion is set when the SBA sells the debenture to fund the loan. Debenture sales occur monthly for 20-year loans and bimonthly for 10-year loans. The rate is then fixed for the term of the loan. SBA 504 debentures are government-guaranteed securities. The effective rate (APR) will include program fees and a loan-loss subsidy. Rates are typically below market fixed rate.

Collateral
SBA 504 loans typically are secured by a lien on fixed assets acquired with loan proceeds to reasonably assure loan repayment. The SBA’s lien is subordinate to the private lender’s position. In addition, the SBA requires personal guarantee(s) of the principal(s).

SBA CERTIFIED DEVELOPMENT COMPANY (504) LOANS