504 Program & Refinancing
SBA Loans - 504 Program & Refinancing
SBA Loans - 504 Program & Refinancing
Prosper Financing offers SBA loans including the 504 program and the 7a program. Please note that the House and Senate are making some important changes to SBA loans and the 504 program as part of the new economic stimulus package.
- Learn about the SBA 504 loan program changes – part of the new economic stimulus package.
- New SBA 504 commercial loan refinance provisions
SBA 504 Loans - Requirements
| Loan Size: | $750,000 to $10 Million |
| Occupancy: | >51% Owner Occupied |
| Minimum Personal Credit Score (FICO): | 650 – No Bankruptcy |
| Acceptable Markets: | Urban/Suburban Areas |
| Non-Acceptable Collateral: |
|
| Preferred: |
|
| Minimum Equity: | 10% |
Use of Proceeds
The SBA 504 loan program may be used in the ways listed below.
Uses
- The purchase of land, including existing buildings
- The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
- The construction of new facilities or modernizing, renovating or converting existing facilities
- The purchase of long-term machinery and equipment
 Illegal Uses
- Working capital or inventory
- Consolidating, repaying or refinancing debt
- Speculation or investment in rental real estate
Loan Amounts
Job Creation – The maximum SBA debenture is $5 million for meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal (see below).
Public Policy – The maximum SBA debenture is $5 million or $5.5 for small manufacturing or when meeting the public policy goals of energy reduction or alternative fuelsl. Examples of public policy goals include:
- Business district revitalization
- Expansion of exports
- Expansion of minority business development
- Rural development
- Increasing productivity and competitiveness
- Restructuring because of federally mandated standards or policies
- Changes necessitated by federal budget cutbacks
- Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
- Expansion of small business concerns owned and controlled by women
Small Manufacturing – The maximum debenture for small manufacturers is $4 million. A small manufacturer is defined as a company that has its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and all of its production facilities located in the United States. To qualify for a $4 million 504 loan, your business must meet the definition of a small manufacturer and accomplish one of the following:
- Create or retain at least one job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)]
- Improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act]
Other Terms
Collateral- Generally, the project assets being financed are used as collateral. Personal guarantees of the principal owners are also required.
Maturity Terms- Maturity terms of 10 and 20 years are available.
Interest Rates- Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues.
Requirements
- Operate as a for-profit company
- Do business (or propose to) in the United States or its possessions
- Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
- Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
- Be an eligible type of business. While the vast majority of businesses are eligible for financial assistance from the SBA 504 program, some are not. Check this list of eligible and ineligible types of businesses to see if your company qualifies.
- Under the 504 Program, Plan to use proceeds for an approved purpose. CDC/504 loan proceeds may be used for the financing of fixed assets like real estate or equipment. This list explains Eligible and Ineligible Use of Proceeds.
- Not have funds available from other sources. SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds.
- Ability to repay the loan on time from the projected operating cash flow of the business
- Good character. SBA 504 obtains a “Statement of Personal History” from the principals of each applicant firm to determine if they have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community
- Relevant management expertise
- Feasible business plan
SBA Loan Checklist
Once you have decided to apply for a loan guaranteed by the SBA, you will need to collect the appropriate documents for your application. The SBA does not provide direct loans. The process starts with your local lender, working within SBA guidelines. Use the checklist below to ensure you have everything the lender will ask for to complete your application. Once your loan package is complete, your lender will submit it to the SBA.
Checklist
1. Personal Background and Financial Statement – To assess your eligibility, the SBA also requires you complete the following forms:
* Statement of Personal History – SBA Form 912
* Personal Financial Statement – SBA Form 413
2. Business Financial Statements – To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
* Profit and Loss (P&L) Statement – This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
* Projected Financial Statements – Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
3. Ownership and Affiliations – Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
4. Business Certificate/License – Your original business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
5. Loan Application History – Include records of any loans you may have applied for in the past.
6. Income Tax Returns – Include signed personal and business federal income tax returns of your business’ principals for previous three years.
7. Résumés – Include personal résumés for each principal.
8. Business Overview and History – Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
9. Business Lease – Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
10. If You are Purchasing an Existing Business – The following information is needed for purchasing an existing business:
* Current balance sheet and P&L statement of business to be purchased
* Previous two years federal income tax returns of the business
* Proposed Bill of Sale including Terms of Sale
Requirements
* Operate as a for-profit company
* Do business (or propose to) in the United States or its possessions
* Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
* Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
* Be an eligible type of business. While the vast majority of businesses are eligible for financial assistance from the SBA 504 program, some are not. Check this list of eligible and ineligible types of businesses to see if your company qualifies.
* Under the 504 Program, Plan to use proceeds for an approved purpose. CDC/504 loan proceeds may be used for the financing of fixed assets like real estate or equipment. This list explains Eligible and Ineligible Use of Proceeds.
* Not have funds available from other sources. SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds.
* Ability to repay the loan on time from the projected operating cash flow of the business
* Good character. SBA 504 obtains a “Statement of Personal History” from the principals of each applicant firm to determine if they have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community
* Relevant management expertise
* Feasible business plan
SBA 504 FAQS
- SBA loans for healthy expanding businesses.
- Loan fixed rate below market financing.
- Financing for fixed assets: real estate, machinery and equipment.
- SBA 504 loan term of 20 years for real estate, 10 years for machinery and equipment.
- Down payment requirement of only 10% or more for customer.
- Lender/Bank can provide 90% financing for customer.
- Lender/Bank can participate in larger transactions.
- Lender/Bank enjoys first lien, lending 50% of value at market rate and fees.
- For profit businesses.
- Tangible net worth not to exceed $8.5 million.
- Net profit after taxes not to exceed $3 million during previous 2 years.
- Purchase land, purchase or construct building.
- Modernize, renovate or improve building.
- Purchase machinery and equipment with 10 year useful life.
- Soft costs and/or closing costs.
- Total project size $125,000 minimum.
- No maximum total project size.
- Non-profits.
- Speculative development.
- Lending institutions, insurance companies.
- Gambling concerns and private clubs.
- Refinancing.
- Working capital.
- Inventory.
- Rolling stock.
What is the SBA 504 Loan Product?
5 or 10 year treasury bond rate plus approximately 210 basis points.
- 50% Lender/Bank in 1st Lien
- 40% 504 in 2nd Lien
- 10% Equity
- Start-up or Special Purpose Building will require 15% equity.
- Start-up and Special Purpose Building will require 20% equity.
- Minimum 10 year term on real estate, minimum 7 year term on machinery and equipment.
- Market rat and fees.
- Covenants established by lender.
- One time 1/2% fee to SBA on Lender’s participation.
- Debenture Fees: 2.65% of 504 loan.
- All of the fees can be financed.
- Personal guarantee by 20% or greater owner.
- CHANGE 1 – The combined loan amount has been increased to $10 Million
- CHANGE 3 – Refinances under 504 were previously ineligible. That has been amended.
- CHANGE 3 – To create liquidity and allow banks to lend, the SBA will guaranty up to $3 billion for 504 first mortgage pools to be sold.
SBA 504 Loan Refinance - Now Available
Newly enacted legislation will allow small businesses to refinance existing debt within the 504 program. These permanent changes will permit 504 debt refinancing:
Not Sure How to Refinance Under the 504 Program?
We can show you how to refinance under 504 and even pull equity out of the project for business expenses!
USES Proceeds may be used for the refinance of existing loans whose proceeds were used substantially (85%) to acquire fixed assets eligible for the SBA 504 program. In addition, loan proceeds may be used to pay Eligible Business Expenses such as maintenance of building (no expansion to building), equipment purchases, rent, utilities, inventory or other obligations. These expenses must be incurred but not paid prior to the date of the application or come due within 18 months of the date of the application. All proceeds must have been used for the benefit of the small business concern.
STRUCTURE AND BORROWER EQUITY
- 50%, varies – Loan secured by a senior lien from a third-party lender for not less than the net 504 loan.
- Up to 40% – SBA 504 Loan secured by a junior lien from CP/SBA.
- Not <10% – Borrower equity in the existing real estate and/or cash injection as needed. Additionally, the Borrower may pledge equity in any other fixed assets that are acceptable to SBA as collateral.
The Third Party loan and the 504 loan combined may not be more than 90% of the fair market value of the fixed assets securing the loan. In no event may it exceed the outstanding principal balance of the debt refinanced, eligible business expenses & closing costs. COLLATERAL An independent appraisal supporting the fair market value of the fixed assets being refinanced and any other assets being offered as collateral whether commercial or residential must be submitted at SBA application. The appraisal(s) must be dated within six (6) months of the date of application. FEES The Borrower is required to pay an annual guarantee fee to cover the cost of the refinancing program in the amount of 1.043%. ELIGIBILITY REQUIREMENTS
- Loans being refinanced must have been current for the past year according to the original or modified terms, with no payment being past due for more than 30 days. Any modification must have been entered into prior to issuance of SBA final rule on 10/12/11. A transcript must be provided to demonstrate compliance with this requirement. For the refinancing of same institution debt, the transcript of account for the entire period of the loan must be provided. This will be used to determine the overall creditworthiness of the Borrower.
- No refinancing where the creditor on the debt to be refinanced is in a position to sustain a loss; causing a shift to SBA of all or a portion of a potential loss from an existing debt.
- Debt being refinanced must have been incurred not less than two years prior to the date the application is received by SBA. Additionally, the small business concern must have been in business for two years prior to the submission of the application.
- Debt may be refinanced even if it does not meet the job creation requirement or other public policy goals set forth by the SBA. In such case, the 504 loan size may not exceed the amount obtained by multiplying the number of full-time equivalent employees (40 hour work week) of the Borrower by $65,000.
- Borrower must currently occupy 51% of the building being refinanced.
RESTRICTIONS
- No refinancing of loans with an existing federal guaranty; such as an SBA 7(a) or 504 loan or an USDA loan.
- No refinancing of debt to an Associate of the Borrower, an SBIC, or New Market Ventures Capital Companies (NMVCC).
- When the debt being refinanced is same institution debt, the Third Party Loan cannot be sold on the secondary market as part of a pool of guaranteed loans.
CLOSING
- All loans approved must be closed within 6-months. Loans will be canceled by SBA if not funded during this time period.
- When loan being refinanced is Same Institution Debt, either an escrow account or an interim loan may be used. When loan being refinanced is not Same Institution Debt, an interim loan must be used.
- Any delinquency on loans being refinanced after SBA approval but before the loan funding must be reported to the SBA as an adverse change.
Approved under the Small Business Jobs Act of 2010, the SBA 504 Temporary Refinance Program allows for the refinance of qualified debt under the SBA 504 Loan Program through September 27, 2012.
- Click for SBA 504 Debt Refinance Interest rates.
Effective immediately, Commercial Loan Direct is accepting loan applications that include refinances. Please give us a call if you have questions or would like to discuss a specific situation.
The SBA 504 Loan Program Is one of the best financing vehicles available for new and expanding businesses. With up to 90% loan-to-cost available under SBA 504 loans, owners of small and mid-sized businesses can preserve capital and maximize cash flow to better afford purchasing commercial real estate instead of leasing. Our borrowers get real estate financing with less money down, longer fixed rate terms, and great customer service and turn around times from Commercial Loan Direct.