In 1953, the U.S. government formed the Small Business Administration to help jump start and grow the business sector. The U.S. Small Business Administration or know known by many as the “SBA” has the goal of preserving free & competitive enterprise within the United States and is charged with maintaining the strength of our economy. The SBA offers a loan program called the “504-loan”. This is an alternative  financing  method for the small business owner to conventional commercial loans.

SBA 504 loans are a partnership consisting of the SBA, the small business applicant and a third party lender. Usually, 504 loans are for special projects and the loan works by dividing the amount lent between the third party lender, who gives about half the money, and SBA or one of its affiliates gives about 40% of the money. The remaining 10% is what the small business has to come up with for the particular project.

SBA 504 loans consist of three parts. The first part is the 50% that the third party lender provides. This loan does not carry all of the benefits of the 504-loan program. The third party lender determines the interest rate and term of this part of the loan. The SBA or one of its affiliates provides the second part, which is 40% of the total project. This second part of the loan cannot be more than two million dollars and must be for a term of 20 years or less. The final part of the loan is that which the small business provides. Unless the total cost of the project is higher than the amount the SBA can provide, the small business does not have to come up with more than 10% of the total cost unless it is a special use property.

Benefits of a 504 loan are down payments that are lower than a traditional commercial loan, you can finance some fees into the loan and easier under-writing (easier to qualify).

Some of the things you can have a  504 loan for are to: purchase a building, renovate an existing buildings, acquisition of land for improvements, acquisition of equipment.

To be eligible to qualify for the SBA 504 loan program the business must be for profit.  All non-profits are in-eligible for a 504-loan. The business also has to be worth less than 7 million dollars and have profits less than 2.5 million USD per year for the last two years. 504 loan applicants must be the primary occupants of a building, occupying 51% or more of the building that is being financed.  If the loan is a construction loan for a new commercial building, then they must occupy a minimum of 60% of the building.

Since the SBA is concerned with the expansion of jobs.  All 504 loan applicants must prove that for every $35,000 borrowed that at least one job will be created or retained.

Those not eligible for the 504 loan programs are: Non-profit organizations, banks, other lending institutions, real estate companies, real estate investors, development companies and some other businesses.

Leave a Reply