Article by Roger Schlueter, MBA
The SBA 504 Loan Program touts as one of its benefits a LOW DOWN PAYMENT. The down payment is Ten Percent but that is if you are an existing business that is expanding or just buying new stuff.
1) Existing Businesses must inject 10% of the Total Project Costs.
2) New Businesses must inject 15% of the Total Project Costs. The Certified Development Company,
CDC that approves the project and packages the project for SBA approval can deem the New Business
an Existing Business if the Management has had experience with running a business in the past and
that would reduce the Down Payment to 10%.
3) Financing a building with Limited or Special Purpose Property like a Motel, Gas Station / Convenience
Store, Nursing Home or Sports Facility, etc. must put in an additional 5% and there is not way around
this requirement.
4) The business must put in 20% if the business is new and the building is Special Pupose. The
additional equity will reduce the SBA’s Contribution.
5) Land can be used as equity but it must be supported by an appraisal.
6) The Equity can be Borrowed as Seller Financing or Elseware but the Lender of the Equity’s Lien must be
Subordinate to the SBA’s Lien. The Lender may not have the loan paid off faster than the SBA. (that
means a 20 year term). You can always borrow the Equity and then several years later ask the SBA if you
can pay it back faster than the SBA, they will usually agree.
7) Other Collateral can be used as equity but if borrowed the borrower must demonstrate Repayment from
the Cash Flow of the business or other sources.
The problem with borrowing the Equity from the Seller of the Property (which is the most used way to borrow the Equity) is that the Seller gets a subordinate lien and he has a long payback. You will find it hard to get agreement from the seller on these two points.
Please see my website for contact information at www.schlueterfinancial.com