What is a 504 loan, you ask? Here’s the skinny, but don’t forget to consult with an SBA-approved lender to explore its finer points.
Also called the Certified Development Company or CDC/504 loan, the Small Business Administration (SBA) 504 loan is a commercial real estate loan used to purchase land with buildings on it, fund new building construction, renovate or improve property, or purchase long-term equipment.
The 504 loan is intended to give small businesses long-term funding opportunities that might otherwise not be available through conventional means.
Examples of a SBA 504 loan include:
- Purchasing an office building that will be at least 50% owner-occupied
- Buying an office condo in a larger commercial development
- Purchasing a business that includes its commercial property and other capital assets
- Re-paving a parking lot and/or streets
- Major landscaping investments to enhance curb appeal and value of the property
- Purchasing durable manufacturing or equipment expected to have a lifespan exceeding the life of the loan
- Refinancing debt related to one of the above types of purchase
The borrowing business must be a for-profit company with net worth under $15 million, annual net income under $5 million (after taxes), and be able to repay the loan using cash flow from the business.
The borrower must provide 10-20% of the borrowed amount up front as their down payment, depending on the transaction and type of business. This is significantly lower than the 25-30% equity required by conventional financing, making this type of loan attractive to businesses who rely on cash flow to handle daily operations and inventory, or who struggle to come up with a larger down payment.
Certain types of businesses don’t qualify.
How the 504 loan is different
One of the more interesting aspects of a 504 loan that sets it apart from other SBA products is the partnership built into the program. Like any SBA program, the loan is a government-funded effort to create jobs and drive small business growth – but the 504 also includes a third party: an SBA-certified CDC nonprofit responsible for a specific geographic area, who works with lenders in their territory.
Unlike other SBA loans where the SBA simply guarantees a loan and the lender puts up the money, a 504 loan requires the lender and the CDC to provide a percentage of the funding.
The bank negotiates a first position loan at a fixed or variable rate of interest, typically for 50% of the project costs. Because the loan is guaranteed by the business assets it purchases and is for an amount substantially less than its value, it can be an attractive risk to the lender. The remainder of the loan is paid for by secondary financing through the CDC, paid for by dollars raised from government-guaranteed bonds.
What you need to apply
Quite a bit of paperwork is required to apply for a SBA 504 loan. At a minimum, you’ll need these 10 items:
- A completed loan application, which can be found online or provided by your lender
- Detailed financial statements for your business, including Profit & Loss statements and projections
- Personal history and financial statements
- Resumes for each principal of the business
- Copies of your current lease agreement for the business
- Copies or records of past business loans
- Legal documentation of the business, such as corporation or LLC paperwork and certificates/licenses
- Three years’ worth of income tax returns (personal and business)
- An overview and history of your business
- A list of any subsidiaries or affiliates owned by the business, and any other financial concerns or obligations that may impact the purchase
Additional paperwork is also required if the loan is intended to purchase a business, rather than real estate.
Small Business Administration (SBA) loans are complex and the application process extremely detailed. It must be submitted to the SBA by an approved lender, who will also handle the CDC aspects of the loan.
Can we help?
While it’s useful to begin the research process online once you’ve decided to purchase a commercial real estate property, sitting down with an experienced banker before working on the paperwork is critical. It allows you to explore this loan in detail, along with other alternatives that might be available, so you can make a smart, educated decision.
Horizon Community Bank is a leading SBA lender with deep experience helping borrowers create appropriate paperwork and apply for the 504 loan. To speak to one of our credit officers, click here to find a branch or loan office near you. We’ll walk you through every step of the process!