Article by Roger Schlueter, MBA
The SBA 504 Program for Financing Fixed Assets, such as Real Estate and Machinery and Equipment, is a great program but the Total Cost of Financing with the Program may be a bit misleading. The marketing that is used by the Certified Development Companies, who are partners with the SBA, don’t use all the costs when deriving their Effective Rate that the borrower pays for financing their project.
The Fees or Costs that the Borrower Pays but are not accounted for in the Effective Rate are:
1) The Costs that are Added to the Net Debenture or Note of the SBA in order to prepare and sell the Debenture to the Private Markets. Since these are one time costs and added to the Debenture or Note, they increase the Real Effective Rate on the financing.
2) There is a one-half point charge to the Bank for the Bank having a superior lien position to the SBA and is a one time charge also. This Fee is charged to the Borrower by the Bank.
3) The borrower is required to get an Attorney Opinion Letter stating that the borrowers, Borrowing entity has the right to borrow and that all the documents are executed and Correct. This Opinion Letter can cost anywhere from $500 to $2,500 depending on the Attorney and the Size of the project.
Several of these costs can vary from project to project mainly depending on the Size of the Project and the Provider used. The Costs Added to the Debenture charge a CDC Closing Cost which is usually pegged at $2,500. This cost does not very, with the size, but can go up if the project is a very large project where the SBA Portion is over one million dollars. This is because the Title Insurance will go up and the borrower will pay any cost over the $2,500.
The one-half point charge to the bank for a bank having a superior lien position to the SBA is a fixed charge at one-half point or 0.5% of the Banks Loan amount. At one time this fee was levied to the bank and could not be charged to the borrower but this has changed and now the Bank Charges this fee to the Borrower and the SBA is Fine with the Borrower Paying this Fee.
The Attorney Opinion Letter is a charge that the Cost varies on the Attorney Hired and the Size of the Project. The Attorney has Liability/Malpractice Insurance that covers him if he is mistaken in his legal opinion and on large projects the Liability/Malpractice Insurance is not enough to cover the Debenture Amount and that is why they Charge more for Large Projects.
The following Example is an Example and should be used as a Guide to the Fees Charged but not an Absolute Amount that you would be charged. Some are variable on the Size and some for other reasons referred to in the article previous to this Example. Look at this Example as a Guide to the Fees Charged but not an absolute on the amount charged. Also any approximations on the Effective Rate that these fees will increase the financing amount are Estimated and should not be used as your costs. You will have to perform a detailed examination of your costs to arrive at the true Effective Rate.
Example
SBA 504 with a Total Project Cost of $500,000
Bank Lending 50% $250,000
SBA Lending 40% $200,000
Borrower Equity* 10% $ 50,000
*Existing Business
The Following are Up Front Fees that are added to the SBA Debenture or SBA Note but are not included on the Quoted Effective Rate by the Development Company Funding Corporation.
1) SBA Guarantee Fee 0.50%
2) Funding Fee 0.25%
3) CDC Fee*2 1.50%
4) Closing Costs*3 1.25%
5) Underwriter Fee*4 0.41%
Total Fees Added 3.91%
*2 CDC is the local Certified Development Company
*3 This Fee is usually a flat $2,500 but can go up for large deals.
*4 This is an estimate of the actual Fee based on a Formula
Other Fees Not Included in the Effective Rate
1) Third Party Lenders Fee passed on to the Borrower 0.50%
2) Borrower Attorney Fee for Issuing Opinion on Loan*5 0.50%
Total of Other Fees 1.00%
*5 This Fee can vary from $500 to $2,500 based on Attorney and Size of Deal.
Final Total of All Fees that are not included in the Effective Rate 4.912%
This increases the Effective Rate approximately 0.58% or a little over 1/2 of one Percent over the course of 20 years and can be larger if you do not keep the loan to its maturity. The June effective Rate given by the Program is 5.52% but as we see could be as high as 6.1%.
The SBA 504 Program is still one of the best Loans for a Small Business borrowing for Real Estate and Equipment on a long term basis. That is what you are really getting with the program, a Fixed Rate for 20 Years on up to 40% of the Project Costs.
*** This example uses the increase of rates as of October 2011. The effective rate will also increase an additional 0.1885% because of the Ongoing Guarantee Fee increase. This would have brought the rate to 6.2885%***
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