Eligible Uses of SBA 504 Loan Funds
A 504 loan may be used to:
- purchase / renovate / expand an existing building;
- purchase land & construct a new building;
- purchase capital machinery & equipment;
- purchase FF&E in conjunction with real estate;
- some debt refinancing in conjunction with a new project;
- some refinancing of conventional loans, for a limited period, where no expansion is involved;
- professional fees directly related to the project.
Typical SBA 504 Structure
A commercial lender will finance 50% of the total project cost using a conventional loan product secured by a first deed of trust / UCC on the property or equipment being financed.
The SBA 504 loan program will finance up to 40% of the total project cost by selling a debenture instrument (= bond) on the NY market which is supported by the full faith and backing of the US government.
The small business will have at least 10% down / at risk in the project.
The maximum SBA 504 share reduces to 35% and the small business down payment increases to 15% on projects where the business is "new" (i.e. less than two years old) OR the project property is a limited or special use property (i.e., gas station, car wash, motel, recreation center, etc.). The maximum SBA 504 share reduces to 30% and the small business down payment increases to 20% on projects where the business is both "new" AND the project property is a limited or special use property.
SBA 504 Interest Rates
SBA 504 interest rates are set by the market each month when the 504 bond is sold. The most recent (February 2012) interest rate was 4.711% (= a fixed rate) for the twenty year 504 bond pool.
The most recent (January 2012) interest rate for the ten year 504 bond pool (sold only every other month) was 4.049%.
To see charts depicting current rates and recent trends, please click HERE.
SBA 504 Loan Limits
The SBA 504 may not finance more than 40% of a project cost nor may it be a larger percentage than a commercial lender's share. In addition, the dollar amount of the SBA 504 loan may not exceed either $5.0 million or $5.5 million (in the case of certain manufacturers and businesses meeting defined SBA "green" goals). There is no restriction on the percentage or dollar amount of a project that may financed by a commercial lender.
SBA 504 Fees
The one time costs associated with securing an SBA 504 loan are approximately 2.65% on the SBA 504 share of the project plus 0.5% on the bank share of the project.
Owner Occupancy Tests
SBA 504 loans are only available to small businesses who meet defined owner-occupancy guidelines. If a project facility is an existing structure, the active small business (or businesses -- it is possible for multiple firms to join together to secure a 504 loan) needs to occupy 51% of the available interior space of a building. If the project property is being newly constructed, the occupancy test requires the active small business / businesses to initially occupy 60% of the interior space, with a reasonable expectation that this occupancy will increase to 80% in ten years. It is common for applicants for 504 loans to create new entities to hold title to the project real estate although in these cases, the only reason that a 504 loan is being made is on the basis of the active business / businesses, who will be required to be a guarantor or co-borrower on the loan with that passive entity.