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The US Small Business Administration developed the 504 program in the 1980’s out of the former 501, 502, and 503 programs. The program is focused on financing long-term assets for job creation in local markets, stabilization of local economies, and business development in underserved markets. LiftFund CDC will use our vast experience to help you as a lender initially determine eligibility for the program, structure the loan project prior to approval, and provide expertise on the 504 program throughout the lending process.
As a Non-profit CDC, we are keenly aware of borrowers’ needs to squeeze every dollar for the benefit of their company while still using our traditional banking experience to meet the needs of credit policy in our partner lenders. Customer service is our primary focus both for our banker customers and our borrowers.
Typical 504 Financing Structure
- The Bank finances 50% of the project
- The Bank has the first-lien position
- The borrower can retain more cash
- The equity injection can be cash or land equity
- Projects must be fixed asset-related with no goodwill or working capital allowed
- If a business is considered a start-up, the SBA requires an additional 5% equity investment from the borrower, bringing total equity to 15%
- If the project property is considered “special purpose” the SBA requires 5% more in equity from the borrower bringing total equity to 15%
- A special-purpose property refers to a property that cannot be easily converted to a different industry (ie a car wash or hotel) and is clearly defined by NAICS code by the SBA. Connect your lending representative to verify eligibility.
- If a project is considered a start-up and “special purpose” the borrower must contribute 20%
- Start-up projects that are special purpose require very detailed projections, and most times a feasibility study to obtain SBA approval. Connect with your lending representative for additional details.
- Under certain circumstances, new locations can be considered an expansion of existing companies and may not require the additional 5% equity for new businesses. Please contact your LiftFund CDC lending representative to verify equity requirement.
Typical Project breakdown
Any costs incurred within 9 months prior to submission to SBA are eligible toward total project costs.
Typical 504 Structure
Bank (50%) – $500,000
SBA / CDC Loan (40%) – $400,000
Borrower (10%) – $100,000
Total – $1,000,000
Land & Building – $300,000
Renovations – $400,000
FF&E – $250,000
Professional Fees – $30,000
Other Expenses – $20,000
Conditions & Benefits
What are the conditions for using the SBA 504 loan to refinance debt?
- Debt must be six months old or older and the business must meet SBA guidelines regarding existing businesses
- There must have been no ownership change in the last 6 months
- Debt must be current for the past 12 months to be eligible
- 85% of the debt from original funding must have been “504 eligible” – meaning it financed CRE or machinery & equipment
- 20% of the appraised value can be cashed out for “eligible business expenses”
- Maximum LTV for refinance is 85%
What are the benefits of the 504 program compared to the 7(a) loan program?
- The lender does not need to be SBA certified or have any knowledge of SBA lending at all. LiftFund provides all the SBA lending expertise!
- Lender can charge origination fees and finance the first lien with mini-perm as long as term at least 10 years.
- The lender never needs to provide reports to the SBA.
- The lender can offer a blended rate to the borrower, combining their private rate and the SBA 504’s low fixed rate.
- The only collateral required is the assets financed by the project.
- The SBA 504 fees are lower than SBA 7(a) fees and are always financed into the project.
- Green-certified projects can exceed the traditional limits of 7a.
- There is no upper limit on a project’s size.
Why do successful lenders use 504?
- Participating lenders receive a “first lien” position on project property
- A low LTV, usually 50% or below, strengthens the lender’s portfolio
- Soft costs can be financed
- The 504 preserves borrower cash with a low down payment
- The 504 improves borrower cash flow with a low interest rate and long term
What are additional benefits to lenders?
- Oftentimes 504 projects allow the lender to approve loans that may not fit traditional credit policy
- Allows lender to approve large projects that may exceed bank lending limits
- The SBA can never deny or repair your guaranty on a 504 loan
- Non-bank lenders can participate in the 504 program without an SBA license