- What is a 504 Loan?
The SBA 504 loan program enables businesses to obtain 90% financing for the purchase of fixed assets, (real estate, heavy machinery and equipment).
Using this program, your Bank will fund 50% of the project, the US Small Business Administration, (SBA)/CP504 will fund 40% of the project, so that you will only need to provide 10% of the total project cost.
The SBA portion is 100% guaranteed and carries a lower interest rate that is FIXED for 20 years. You can see the current rate in the box on your right.
- What can the 504 loan program be used for?
- Purchasing land and/or constructing a building for your business
- Purchasing an existing building for your business use, and converting, renovating it to meet your needs
- Furniture and fixtures that are an integral part of the project
- Soft costs associated with the acquisition such as appraisal, environmental studies, architectural fees, engineering fees etc.
Machinery & Equipment
- Purchasing machinery and equipment that has a useful life of 10 years or more.
Refinancing Existing Debt
- Refinancing conventional debt can be considered in conjunction with expansions.
- How much can I borrow?
How much do you need? There is no limit to the size of the project, but the CP 504 portion is limited to 40% of the total project costs up to a maximum of $5,000,000. (In some cases we can increase this to $5.5m so it is always good to talk to a loan officer, 708 995 7136, about your specific needs).
Typically we work with projects from $300,000 to $13,000,000.
- Can every business use this program?
Yes within certain constraints:
- The business must be a ‘for-profit’ business
- Must qualify as a small business. Businesses with an average net profit of less than $5m, (averaged over the last two years)and
or net worth of $15m or less.
- The building must be for the use of the business – for purchase of existing buildings the business must occupy at least 51% of the available space; for construction of new buildings the business must occupy 60% with the potential to occupy at least 80% in the future
- Do all 504 loans require only a 10% down payment?
There are circumstances when additional equity is required:
- Businesses that are less than 2 years old will be required to put an additional 5% into the project
- Businesses purchasing a single purpose building such as a gas station, funeral parlor will be required to put an additional 5% into the project
- A new business purchasing a single purpose building will required to have 20% equity into their project.
- What sort of terms can I expect on the loan?
- Real Estate loans will have a fixed rate 20 year term
- Machinery and Equipment loans will have a fixed rate 10 year term
- The rate is set at the time the SBA potion of the loan is funded and based on the 10 and 5 year treasury respectively
- The current rate is posted on the side bar. Historical rates can be seen here.
- Can I prepay my SBA 504 loan?
You can, but there are prepayment penalties for the first 10 years on a 20 year real estate loan, (7 years on the 10 year equipment loans). You cannot make additional payments against principal either to reduce the loan duration. This only applies to the CP 504/SBA portion of the loan. The bank may have different conditions on its portion of the loan. Should you sell your business during the prepayment penalty period you should note that the SBA loan is assumable by a qualifying small business.
- I have heard that there is a lot of additional paperwork and time involved in an SBA loan. Is that true?
Not anymore. For a 504 loan all you have to do is provide the documents listed here, most of which you will already have in your possession and CP 504 will do the rest. The SBA has made significant changes over the last few years to make the process much smoother and simpler.