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Program Description
Overview of SBA 504 Loan Program
The SBA 504 Loan Program, established by Congress in 1986, is a national financing program designed to assist small and medium sized businesses create jobs and acquire equity producing real estate. The Fixed-asset SBA 504 loan program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of longterm fixed assets, such as land, buildings, machinery and equipment, or the building, modernizing, renovation or restoring of facilities. The interest rates provided by Preferred Lending Partners are below market and fixed for the term of the loan based on Treasury Rates for five or ten years. Preferred offers a 10 or 20 year term on its loans. To qualify for the SBA 504 Program, the business must be for-profit with a net worth of less than $8.5 million, and have a two-year average net profit
after taxes of less than $3.0 million. Furthermore, the business should create one job for every $65,000 of SBA 504 Program financing (over a two-year period) or meet other economic development goals of the SBA and local community. Businesses that typically receive SBA 504 loans are manufacturers, distributors, retailers, hospitality, medical practices (including animal care), and service companies.
A loan made under the SBA 504 Loan Program contains the following three parts:
- A First Mortgage Loan provided by the borrower’s financial lending institution, up to 50% of project cost. The private lender’s note is separate and carries its own rate, terms and conditions. The private lender charges a market rate for the loan with a minimum term of 10 years.
- A Second Mortgage Loan from Preferred Lending Partners and the SBA, up to 40% of project cost or a maximum of $1,500,000 (under special circumstances, up to $2,000,000 is available). In some instances some borrowers may qualify for a maximum of $4,000,000; manufacturers and sustainable projects.
The term of the SBA 504 loan can be as long as 20 years for real estate and 10 years for equipment. The interest rate is fixed for the maturity period. The interest rate is below market, fixed and determined at the time of SBA funding. Therefore providing the borrower predictability of cash flow.
- A down payment from the borrower, typically 10% of total project cost. If the business facility is for special usage, the required down payment may be as much as 15-20% of total project cost. If the business is a start up a minimum of 15% will be required.
The down payment can be cash, equity in land or building, existing equipment or any other fixed assets that are part of the project.
The SBA 504 loan amount and the required equity contribution will depend on credit and eligibility factors. These are the things the Preferred Team will address.
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