SBA 504 Loans-An Important Tool for Community Lenders 2015
1. SBA 504 Loans
An Important Tool
for Community
Lenders
Alabama Bankers Association
Annual Meeting
June 14-18, 2015
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2. Southern Development Council, Inc.
∗ Dana Moore, Executive Director
∗ Jennifer Seymour Bhojwani, Business Development Officer
∗ Beau Strong, Business Development Officer
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Presenters today…
3. ∗ What is the 504 Loan Program?
∗ What customers are eligible for 504 financing?
∗ What is the 504 Loan process?
∗ Why would I offer the 504 Loan Program to my customers?
∗ Myth vs. Fact
∗ What about the other SBA program, the 7A?
∗ Question & Answer
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Purpose of presentation
4. ∗ Economic development financing tool
∗ Delivered/administered by CDCs (certified
development companies)
∗ 504 project generally has three main partners; Bank,
CDC, Small Business
∗ 504 project involves fixed asset financing to for-profit
businesses
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What is the 504 Loan Program?
5. ∗ Business customers that are for-profit
∗ Applicant must use the project property
- Cannot finance assets for passive income except in the EPC/OC
situation
∗ Located in the United States or its territories
∗ Defined as “small” by SBA definition:
- Tangible net worth of $15 million or less; and
- Average net income after Federal taxes of $5 million or less for the
preceding two fiscal years
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What customers are eligible for
504 financing?
6. ∗ Operating company must occupy 51% of an existing
building or 60% of a new building
∗ Demonstrate a need for the 504 Loan by applying the
“Credit Elsewhere Test” and “Personal Resource
Test”
∗ Meet an economic development objective of the 504
program –job creation/retention
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What customers are eligible for
504 financing? (cont.)
7. ∗ Businesses that currently own land and are ready to construct
their building
∗ Now leasing with an option to purchase the property
∗ Currently own their facility and time to remodel, renovate and/or
expand
∗ Ready to purchase land and construct a building
∗ Want to move and purchase an existing building
∗ Expanding into new markets and want to add an additional site
∗ Business needing new long-life equipment
∗ Leasehold improvements
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What customers are eligible for
504 financing? (cont.)
8. SBA Loan Maximum 504
Loan amount
Standard 504 Loan Maximum $5million
Meets 1 of 14 Public Policy Maximum $5 million
unless also meets Energy Maximum $5.5million
goals
Manufacturer Maximum $5 million
per project
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How much financing can the 504
Program provide?
9. ∗ Contact the CDC
∗ Structure the financing with the three partners – Third
Party Lender, CDC, business applicant
∗ Typical structure 50/40/10
> 50% financing provided by Third Party Lender of eligible 504 costs
> 40% financing provided by CDC
> 10% down payment provided by business applicant
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What is the 504 Loan process?
10. Alternate structure 50/35/15 – required for new
businesses or limited or special purpose property
∗ 50% financing provided by Third Party Lender of eligible
504 project costs
∗ 35% financing provided by CDC
∗ 15% down payment provided by business applicant
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What is the 504 Loan process? (cont.)
11. ∗ Alternate structure 50/30/20 - required for
BOTH new businesses AND limited or special
purpose property
- 50% financing provided by Third Party Lender of eligible 504
project costs
- 30% financing provided by CDC
- 20% down payment provided by business applicant
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What is the 504 Loan process? (cont.)
12. ∗ Project Example:
-Total Project Cost $2,500,000
50% Third Party Lender Loan $1,250,000
40% 504 Loan (net of fees) $1,000,000
10% Borrower down payment $ 250,000
Total Sources of Funds $2,500,000
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What is the 504 Loan process? (cont.)
13. ∗ Project Example (cont.)
There is a one time Third Party Lender participation fee
paid to SBA at the closing of the SBA loan. It is ½ of 1% of
the Third Party Lender Loan.
In our example above, it would be
$1,250,000 x .005 = $6,250
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What is the 504 Loan process? (cont.)
14. ∗Third Party Lender Loan
- 50% permanent loan
∗ Must be for a term of at least 7 or 10 years, depending on the
length of the 504 Loan
∗ Third Party Lender receives 1st
lien position on assets financed
∗ Interest rate charged must be legal and reasonable
∗ Must not have any cross-default or cross-collateral feature(s)
∗ Third Party Lender also provides a bridge (interim) loan for the
net 504 Loan amount.
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What is the 504 Loan process? (cont.)
15. ∗ 504 Loan (CDC loan)
∗ Funded through the sale of a debenture –fully guaranteed by
SBA
∗ Either a 10 or 20 year fully amortized note
∗ Subordinate position on assets financed
∗ Fixed interest rate for the full term of the loan
∗ Collateral usually limited to the assets financed
∗ Take-out financing –pays off the bridge (interim) loan provided
by the Third Party Lender
∗ All CDC/SBA fees other than TPL fee are financed by the CDC/SBA
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What is the 504 Loan process? (cont.)
16. Down payment by business applicant
Borrower must inject at least 10% of the 504 project cost, usually
cash.
Alternate down payment: The borrower’s equity in land/building
that will be part of the 504 Project.
In some cases, applicant’s down payment may be borrowed.
** SDC has a Revolving Loan Fund that can be used in some
circumstances to help fund the equity requirement
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What is the 504 Loan process? (cont.)
17. ∗ Borrower completes 504 application and submits to the
CDC. A secure, online application is available at
www.sdcinc.org . Documents such as tax returns can be
securely uploaded.
∗ CDC performs underwriting/credit review
∗ Bank provides commitment contingent upon SBA approval
∗ CDC submits application to SBA for approval
∗ Authorization and Debenture Guaranty issued by SBA upon
approval
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What is the 504 Loan process? (cont.)
18. ∗ Third Party Lender performs their loan closing and
advances both permanent amount and interim loan
amount (net 504 Loan)
∗ Upon project completion, CDC performs loan closing
for 504 Loan
∗ When a project is primarily financing asset
acquisitions a simultaneous closing of both the bank
and CDC/SBA loan is preferred
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What is the 504 Loan process? (cont.)
19. ∗ 504 Loan closing documentation forwarded for legal
review
∗ 504 Loan (debenture) is “pooled” with other 504
Loans
∗ Net debenture proceeds (504 Loan) are wired to the
Third Party Lender to payoff interim loan.
∗ Timing from closing to funding is generally 45-60 days
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What is the 504 Loan process? (cont.)
20. ∗ Borrower makes payments on two loans,
Third Party Lender loan and 504 loan
∗ CDC services the 504 loan while the Third
Party Lender services their permanent loan
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What is the 504 Loan process? (cont.)
21. ∗ Advantages for the Third Party Lender
- 50% Loan to Value
- First lien position on assets being financed
- Greater portfolio diversity and credit risk
management.
- Ability to compete in the market place
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Why would I offer the 504 Loan Program
to my customer(s)?
22. Improved capital performance measures
CRA Credit
Balance sheet management – 504 projects can be
managed so that the take-out financing occurs
before the closing of major reporting periods
Pricing and structure requirements can be
achieved in advance with an eye toward selling
the Third party Lender loan to the secondary
market
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Why would I offer the 504 Loan Program
to my customers? (cont.)
23. Advantages to your customer
∗Low down payment (generally 10-15%)
∗Low, fixed interest rate
∗Preservation of borrower’s working capital
∗Fully amortizing, long term loan (10 or 20 years)
∗Preserves SBA eligibility for future projects vs. using 7a
loan for fixed assets
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Why would I offer the 504 Loan Program
to my customers? (cont.)
24. ∗ In tighter economic conditions may be the only option
∗ Interest rate of bank financing may be more favorable
due to the Third Party Lender’s low LTV
∗ Can finance closing and other soft costs including
interim interest and origination fee on interim loan
∗ Collateral usually limited to assets being financed
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Why would I offer the 504 Loan
Program to my customers ? (cont.)
25. ∗ Advantages to the community
- JOBS JOBS JOBS
- Capital investment increases tax base
- Stimulates other development
- Expanded access to capital
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Why would I offer the 504 Loan Program
to my customers? (cont.)
26. Similar information as provided for the Third Party
Lender loan
∗Historical Financial Statements
∗Personal Financial Statement(s)
∗Tax Returns
∗Financial projections if a new business or historical
performance doesn’t cover existing and new debt
∗Appraisal
∗Environmental assessment
∗Commitment letter from Third Party Lender
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What documents are required in a 504
Loan application?
27. ∗ 504 projects may include a limited amount of
debt refinancing
If the project involves expansion, any amount of the
existing debt that does not exceed 50% of the cost of
the expansion my be refinanced
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New for 504 Loan Program:
Debt Refinancing
28. ∗ Fact: From the time a completed 504 Loan
application is received by the CDC and submitted to
SBA for approval, the process usually takes three to
five working days.
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Myth: “SBA loans take way too long.”
29. Fact: Much of the paperwork for a 504 Loan is
the same as the paperwork provided to the
Third Party Lender. Copies are shared
between the Third party Lender and the CDC.
Documents and information can be securely
uploaded to SDC’s secure server at
www.sdcinc.org
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Myth: “SBA loans have too much
paperwork.”
30. ∗ Fact: The 504 Loan program is designed for
expansion of healthy, credit-worthy
businesses. However, the 504 Loan Program
may also be used for start-up businesses.
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Myth: “SBA loans are last resort
financing.”
31. ∗ Fact: Fees for the 504 loan are as follows:
Bank Fee .5%
(based upon the amount of Third Party Lender’s permanent first lien loan)
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Myth: “SBA Loans have too many fees.”
32. ∗ CDC Processing Fee 1.50%
∗ SBA Guarantee Fee .50%
∗ Funding Fee .25%
∗ Underwriting Fee .40%
∗ TOTAL 2.65%
All of these fees based upon the CDC/SBA loan amount only, and are
added to the CDC/SBA loan.
∗ May also add closing costs in the 504 Loan up to $5000 which are
amortized over the life of the loan.
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Myth: “SBA Loans have too many fees.”
33. ∗ Fact: In recent years, 504 Loan interest rates have
been at market rate or below.
- Note: 504 Loans (40% of the financing package) have fixed interest
rates which help provide an excellent blended interest rate with the
Third Party Lender loan (50 of the financing package).
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Myth: “SBA Loan interest rates are too
high.”
34. ∗ Fact: The borrower and Third Party Lender
don’t have to remember the rules. Call your
CDC expert who knows the details of the 504
Loan Program. It is the CDC’s responsibility to
know the rules to navigate eligibility and
ensure compliance.
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Myth: “SBA means lots of regulations I
have to remember.”
35. ∗ Winner! Third Party Lender
∗ Winner! Small Business
∗ Winner! Community
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504 Loans: Let out the well-kept secret!
36. ∗ Provides financing for businesses through a bank
∗ The SBA guaranty facilitates the extension of credit
∗ Usually utilized for lines of credit and working capital financing,
debt refinancing, short term equipment
∗ May be used as a companion loan with 504 Loan
∗ Guarantee is 85% for loans $150,000 and less
∗ Guarantee is 75% for loans greater than $150,000
∗ International Trade loans and Export Working Line of Credit
Loans have 90% guarantee rates
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7(a)…the other side SBA Program
38. Southern Development Council, Inc.
8132 Old Federal Road
Montgomery, AL 36117
1-800-499-3034 or 334-244-1801
www.sdcinc.org
dnmoore@sdcinc.org
jennifer@sdcinc.org cell 334-318-1482
strong@sdcinc.org cell 334-318-1448
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Contacts
