About SBA 504 Loans
Eligibility for SBA 504 Loans
Permitted Uses of 504 Loan Proceeds
Economic Development Requirements
SBA 504 is a community lending program designed to improve the locality. Eligibility requirements are either:
1) Job creation or retention (one job per every $65,000 borrowed from MCFC under SBA 504)
2) One of the following public policy goals to:
OR One of the following community development goals to:
SBA 504 is not a real estate investment tool. It exists to help the community by helping a small business have an impact on the community-by creating jobs or in other ways benefiting the community.
Deal Structure -- Financing
Determine the total project cost (hard and soft costs). The bank or other financial institution finances 50% of the cost and takes a first mortgage (lien) position on the assets financed. GFDA/HPF, through the SBA 504, finances 40% of the project cost up to a cap and takes a second mortgage position. Applicant can inject as little as 10% equity.
Amount of 504 Loan
There is no limit to the total project cost, however, we can lend up to 40% of the project cost witha dollar cap of $5,000,000 depending on the type of project. In some cases, we can go as high as $5,500,000 for manufacturing projects and/or projects that incorporate energy saving technologies for sustainable design.
Rates and Terms
The rate on the SBA 504 portion is set when we sells the bond to fund the loan. The rate is then fixed for the loan term. 504 bonds are amortized securities. For comparable rates, look at treasury rates. The effective rate (APR) will include program fees and a loan loss subsidy.
Loans are ten or twenty years; self liquidating. In order for us to do a 20-year loan, the lender doing the 50% permanent first mortgage must have at least a ten year term. To do a ten-year loan, the 50% lender must have a term of at least 7 years
We take a subordinate (second mortgage) to secure its 40% portion of the financing, and a security interest in assets financed. Key Man life insurance is generally not required unless there is no succession of management. Other assets of the business or principals are generally not required.
We require the same documents as the lender:
- 3 years of financial statements and federal tax returns on the company (if in existence for 3 years);
- if there is no historical cash flow ability to service the proposed new debt, submit 2-3 years financial projections;
- personal financial statement (assets and liabilities) on the owners of the company;
- written history of the business, reasons for expansion, plans;
- copy of contract of sale;
- personal history statement of principals indicating citizenship status, etc.
Advantages of SBA 504 over Conventional Financing
Low down payment. Just 10%*. Lets the borrower preserve cash for working capital.
*Note: Equity of 15-20% is required for start-ups and businesses with irregular profitability, lack of historical debt service ability, a short track record or for single purpose properties.
· Fixed rate on the SBA 504 portion. For the term of the loan.
Long term. 504 loans are for 10 or 20 years.
Low interest rate. Even with all the fees and closing costs included in the rate, it is still a low rate for a subordinate mortgage loan, particularly for small business. The blended rate between the bank portion and our 504 portion makes the project affordable for business owners.
Banker Benefits. For the banker wishing to participate as the 50% lender, they get CRA credits; lend at a lower loan to value ratio; keep a growing customer happy; have lower risk because the SBA 504 loan is in second position behind them.
Community Benefits. The community gets the advantage of keeping or attracting a healthy, growing small business that will be creating jobs and doing other wonderful things in the community.
For more information please contact our Business Development Officer, Jeremiah Johnson on 406.771.9029 or via e-mail on firstname.lastname@example.org.
IMPORTANT INFORMATION ABOUT IDENTIFICATION PROCEDURES WHEN OBTAINING A 504 LOAN
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all Certified Development Companies to obtain, verify, and record information that identifies each person who applies for a 504 Loan.
What this means for you: When you apply for a 504 Loan, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.