The SBA 504 Program Loan is the best loan for a business that is not renting the assets that are being purchased. The loan is for owner occupied (real estate) or owner used (equipment). The SBA 504 Loan is for Fixed Assets Only – meaning Real Estate, Equipment, Furniture & Fixtures. The SBA 504 Loan can be used for start-up business but was originally intended for existing business (business open for two years or more)
The SBA 504 Loan is structured with a Bank (limited use with non-bank lender). This bank will usually lend up to 50% of the project cost and cannot lend less than the SBA. The SBA will lend up to 40% of the project cost and the borrower must inject a minimum of 10% into the project (start-up business will inject 15% and if the building is a single use property they will also inject 15%).
The SBA obtains the 40% of the project cost from the Issuance of a Debenture. This Debenture has the full faith and credit of the Federal Government so it usually has a fairly low fixed interest rate that has a term of twenty (20) years. The bank uses the same rate as other commercial loans at the bank but the bank has to issue a ten (10) year note (loan does not need to have a fixed rate for ten years). The bank will give a ten (10) year note but will only fix the rate for three (3) to five (5) years. The bank will usually amortize the loan for 20 years which means the payment will be like the loan was for 20 years.. This is an Example:
Lender $ Amount Term
Bank $100,000 10 year note, fixed for 3 to 5 years but amortized over 20 years
SBA $ 80,000 20 year note, fixed for 20 years*
Borrower Equity $ 20,000
Total Cost of Project $200,000
* the SBA portion has a prepayment penalty of the note rate and it will reduce 10% each year until it reaches zero at year ten.
The borrower must use an intermediary to go though the SBA and this group is called a CDC (certified development corporation). The CDC’s are located everywhere and are located within nonprofit groups in cities nationwide.
The real benefit is usually the small down payment, which is usually 10% and the long term Fixed Rate for 20 years on 40% of the project. There are some fees associated with this loan but the Effective Rate is lower than the business can get on it’s own for a twenty year fixed rate loan.
You can Email me if you have any questions or want some help in structuring or setting up this type of loan at roger@schlueterfinancial.com or at my web site at www.schlueterfinancial.com .