Frequently Asked Questions
Can a home equity line of credit be used for the borrower down payment?
If equity is borrowed and secured by another asset, CDC must demonstrate repayment of the loan for the equity contribution from sources other than the cash flow of the business (salary of owner does not qualify).
Can I personally hold title to project property and lease it to my business?
Yes, SBA allows for individuals, trusts, LLCs, corporations or partnerships to hold title to the project property so long as it is leased to the operating company.
How do I qualify as a “Small Business” by SBA standards?
The applicant business and all its affiliates must have a tangible net worth of $15 million or less; and an average net income (after Federal income taxes, excluding any carry-over losses) for the preceding two completed fiscal years of $5.0 million or less.
How is a 504 loan structured?
The most common scenario is known as 50/40/10. Typically, a bank (i.e. – Third Party Lender) will contribute 50% of the total project cost. EDF will contribute 40%, and the borrower will contribute 10% of the total project cost.
When a business is new, or the project property is considered “special purpose”, SBA will require an additional 5% injection from the borrower. When a business is new AND the project property is considered “special purpose”, SBA will require a total of 20% from the borrower.
How long does it take to get approval for a 504 loan?
Upon receiving all complete information and documents from the bank and borrower, the loan process can be achieved relatively quickly. In most cases, the timing of approval can be expedited when EDF is brought into the process early, and when all required documentation has been received from the bank and borrower. Typically, SBA loans do not take longer to approve than conventional bank loans.
Is there a penalty if I prepay my loan?
Yes. Prepayment penalties result in a much lower interest rate for small business borrowers. An option to prepay at anytime with no penalty would cost well over another point on the debenture rate.
If you choose to pre-pay a 20 or 25 year SBA 504 loan in the first 10 years, there is a pre-determined, non-negotiable prepayment penalty required by the SBA.
Here’s what you need to know:
- The prepayment penalty declines in an accelerated fashion over the first 10 years and is eliminated in year 11.
- The prepayment penalty is calculated based on the loan’s debenture rate. For example, in December 2017, the fully effective rate of the loan was 4.50% and the debenture rate was 2.78% (the debenture rate is significantly lower than the effective rate).
- The maximum prepayment penalty would be the full debenture rate (2.78% in this example) of the principal remaining on the second mortgage. This amount declines by 10% each year, so five years in, the prepayment penalty would be cut in half, or approximately 1.39% of the outstanding balance.
- If you are planning to pay your 504 loan off early, call us as soon as possible so we can walk you through the process and get it on the schedule.
If you have a 10-year-term loan, the same principles apply; the penalty declines in an accelerated fashion over five years.
What “soft costs” can be included in a 504 loan?
Yes, ‘soft costs’ (e.g. – appraisals, environmental, interim interest, title insurance) can be financed with the 504 loan, allowing the small business to preserve working capital.
What are the main advantages of a 504 loan?
There are 3 primary advantages of an SBA 504 Loan:
- Low Down Payment – 10% Borrower Injection in most cases
- Long Term, Fixed Rate Financing – 20-Year Fixed Rate for Real Estate, 10-Year Fixed Rate for Equipment.
- Mitigated Risk for the Primary Lender – Bank is in 1st position with 50% Loan to Value
In addition, the 504 loan offers these secondary benefits:
- No balloon payments
- Projected income is considered, not just historical cash flows
- Collateral may be less critical in loan qualification decisions
- Loan may be assumed by a future buyer of the project property
What are the maximum and minimum debenture amounts available with the 504 loan?
SBA 504 loans can finance up to 40% of the total project cost. The maximum debenture amount for a 504 loan is $5 million and for manufacturing businesses, the maximum debenture amount can extend up to $5.5 million. If a business has multiple SBA loans, the aggregate amount of their outstanding loans is also limited to $5 million.
The 504 debenture amount cannot be less than $25,000.
What is an SBA 504 Loan?
The SBA 504 loan is a long-term financing tool, designed to encourage economic development within a community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.
What kind of equipment can be financed with a 504 loan?
Long term machinery and equipment with a useful life of 10 years or more.
What kinds of fees are involved with an SBA 504 Loan?
All administrative fees for the 504 loan are “End Loan Fees”, which means that they are added to the balance of the 504 loan and paid off over the entire term of the loan.
The fees for a 504 loan are as follows:
- CDC Processing Fee of 1.5% of net debenture amount
- Funding Fee of 0.25% of net debenture amount
- CDC Closing Fee of $2,500
In addition to the Administrative Fees, there is an upfront deposit of $2,500.
What will the interest rate be on my 504 loan?
The interest rate is determined at the time of the 504 debenture funding. The interest rate will be fixed for the 10 or 20 year term of the loan from the date of funding. This fully effective rate includes all ongoing monthly servicing fees.
Where can the project property be located?
Economic Development Foundation can finance any eligible project property that is located in the State of Michigan. In some scenarios, property located outside the State of Michigan can potentially be included as part of a refinance project, as long as the new project property is located in the State of Michigan.
Why are different rates quoted for SBA 504 loans?
EDF quotes the industry standard effective rate as published by the National Association of Development Companies on a monthly basis. This number represents the average rate that the small business borrower pays over the twenty year period of the loan. Always be sure to verify that the rate you are being quoted is the ‘effective rate’ as recognized by the 504 industry.
Will I need to personally guarantee the SBA 504 loan?
SBA requires personal guarantees from all individuals and legal entities that hold a 20% or more ownership interest in either the project property or the operating company.
Will I need to pledge my home as additional collateral?
The majority of 504 projects do not require the borrower’s personal residence as additional collateral. In most cases, the project property will be the sole collateral securing an SBA 504 loan. Additional collateral is only required when there is a deficiency in the appraised value of the project property or when other serious credit issues are apparent.
Can a 504 Loan be used to refinance existing debt?
504 projects may include a limited amount of debt refinancing. If the project involves expansion of a small business applicant, any amount of existing indebtedness that does not exceed 50% of the cost of the expansion may be refinanced. The debt being refinanced will be added to the expansion cost to establish the total project costs, if all the conditions discussed below are met. “Expansion” includes any project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business applicant.