SBA 504 Loan Program
SBA 504 loans are geared toward healthy, expanding for-profit businesses seeking long term, low down-payment financing for major fixed assets. It cannot be used for working capital or inventory.
The SBA 504 Loan Program is a lending partnership featuring a third-party lender (usually a bank) providing a fixed or floating rate loan and The St. Louis Local Development Company (“LDC”), a Certified Development Company for the SBA, providing a fixed rate SBA 504 loan.
SBA 504 loans are geared toward healthy, expanding for-profit businesses seeking long-term, low down-payment financing for major fixed assets. These loans can be used for the purchase and renovation of real estate and for the purchase of long-term equipment. They may also be used to refinance existing debt under certain circumstances. These loans cannot be used for working capital or the purchase of inventory.
- The borrower must be a small business with a tangible net worth of $15 million or less and an average net income of $5 million or less after taxes during the preceding two years.
- Loans are generally capped at $5 million.
- The business must create or retain jobs or meet certain public policy objectives.
- The business must occupy at least 51% of the building purchased.
- Non-profit organizations and businesses engaged in speculative real estate investment are not eligible.
- Below-market interest rate fixed for the life of the loan.
- Loan terms of 10, 20, and 25 years.
- Low down payment (typically 10% of the project cost) conserving working capital.
Typical Financing Structure
The typical financing structure for a 504 loan consists of a loan from a third-party lender for 50% of the project cost; a loan from the LDC/SBA for up to 40% of the project costs; and a contribution from the small business owner of 10% of the total project cost.
Loans to start-up businesses and loans for special-use properties will require a borrower contribution of up to 20% of the project cost.
The SBA and the LDC charge the following fees in connection with SBA 504 loans:
- Participation Fee: A one-time, up-front fee paid to the SBA by either the participating bank or the borrower. The fee is equal to ½ percent of the senior mortgage associated with the 504 project and is due at loan closing.
- Processing Fee: A one-time processing fee of approximately 1.75% of the 504 loan amount, which can be added to the amount borrowed and amortized over the life of the loan.
- Servicing Fee: An annual fee of approximately 1.6% of the outstanding loan balance added to the borrower’s monthly payment and paid over the life of the loan.
- Legal Fee and Closing Costs: The borrower is responsible for all legal fees and costs associated with closing the 504 loan. The LDC charges a fee of $2,000 in connection with the loan closing. A deposit of $750 is required upon loan approval for costs associated with closing the loan.