UNDERSTANDING THE 504 SMALL BUSINESS ADMINISTRATION LOAN
The SBA 504 (Small Business Administration loan program) is specifically designed for small to middle sized businesses desiring to purchase commercial property. This type of loan is fairly complex, and any business man or woman considering it should research the topic and understand the various restrictions and qualifications for applying.
For example, one stipulation of this loan is that at least 51% of the property needs to be occupied within a year of taking ownership. Because of this stipulation, two operating companies sometimes form a holding company in order to meet requirements to take title of commercial properties. SBA loans offered by Griffin Capital Funding provide long-term fixed-rate financing and are geared toward projects that range between $150,000 and $10 million. An SBA 504 loan must not exceed 40% of the total project cost.
Those eligible for SBA 504 loans are for-profit businesses engaged in retail, wholesale, service and construction, as well as manufacturing industries. However, these businesses and their affiliates must meet various qualifying standards. Qualifying for the loan requires that borrowers be either US citizens or permanent residents, who own a majority of the company or holding company. Basically, an SBA 504 loan requires three eligibility factors:
- Average net income must not extend past $2.5 million
- The net worth of the operating company should be at or under $7.5 million
- The projected size of the project must be greater than unencumbered liquid assets of the principles.
When properly prepared documentation is brought into the process, business owners find that the application process runs smoothly and efficiently, and saves them several points in interest rates. Many SBA 504 loans close within 60 days but may take longer depending on complexity and type of transaction. Griffin Capital generally issues preapproval within 24 to 48 hours and final decisions are often made within five business days.
Businesses that are not eligible to receive SBA 504 loans are nonprofit organizations, lending institutions, as well as life insurance companies or gambling businesses.
Eligible project costs include, but are not limited to, building construction, renovation and expansion, as well as building and land improvements, equipment acquisition, as well as professional engineering and architectural fees.
Ineligible project costs include, but are not limited to, refinancing debt, vehicles such as airplanes, automobiles and trucks, moving costs, working capital, and bank fees for end loans although other types of SBA loans can be offered in conjunction with a 504 loan to cover these costs.
SBA loan terms can be found to range from 10 to 20 years for real estate and equipment, but most commonly, equipment loan terms require repayment within 10 years and commercial real estate within 20 years. Interest rates are fixed for the full term of the loan, and other issues such as prepayment, collateral, and credit criteria differ per transaction.