SBA 504 Loan

     This combination-type loan package provides the small business with a better financial package than is otherwise available in the market. The private lender (bank) makes a loan of only 50% of the project cost and still receives first mortgage. The SBA makes a subordinated second loan of 40% of the project cost. The business owner is only required to provide 10% to 20% equity.

     The loan program is used for the purchase of land, buildings, machinery and equipment for new and expanding businesses. It is structured as a subordinated gap financing loan. Certified development corporations can package the loan and present the total project to the SBA for approval.

Advantages

•Fixed rate on 30% to 40% of the project.

•Interest rates below conventional market rates.

•Long-term financing.

Use of Funds

•Real estate acquisition.
•Renovation.
•Construction.
•Machinery.
•Expansion.
•Equipment.

Source of funds

•50% (bank loan secured by a first mortgage), 40% (provided by SBA and secured by a second mortgage) and 10% ( provided by cash or equity by business owner or CDC). There is an increased 5% owner equity requirement in cases of new buildings (in operation for 2 years or less) or for single or limited purpose buildings. In both instances the maximum SBA portion would be reduced to 35% or 30% if both apply.

Interest Rates

•Bank's rate negotiated on current market rates.

•Floating, variable rate using prime as an index.

•SBA portion determined from sale of an SBA debenture.

Maturity Term

•Bank's term loan secured by first mortgage can have maturity of 10 years.

•SBA portion will have maturity of 10 or 20 years, depending on project.

Limits

•Bank's commitment not restricted.

•No limitation on total amount of project.

•SBA participation maximum $750,000

•$1,000,000 may be used for project meeting public policy goals, e.g., district revitalization, rural development, export expansion, etc.

Eligible Businesses

•Must be for-profit corporation, partnership or proprietorship.

•Net worth must not exceed $6,000,000.

•Average net profit (after tax) must not exceed $2,000,00 for past two fiscal years.

Ineligible Uses

•Non-profit corporations.
•Working and venture capital.
•Financial institutions.
•Refinancing.
•Real estate investment.
•Inventory.

General

•Usually requires personal guarantee of owner.

Job Creation

•One job must be created per $35,000 of SBA 504 funding.

Source: Alabama Development Office