In December 2012, the 20 year “all-in” fixed rate for 504 loans fell below 4.0% for the first time in the history of the program. Also, the 10 year rate, which adjusts every two months, is at a record low, hovering just above 3.05%. It is a great time to use the 504 program. In [...]
About SBA 504 Loans
Utilizing the U.S. Small Business Administration’s Section 504 Program, Bay Colony Development Corp. provides growing businesses with long-term, fixed-rate financing for the purchase or refinance of major fixed assets, such as land, buildings, machinery and equipment. Operating as a Certified Development Company, Bay Colony is a nonprofit corporation established to contribute to the economic development of local communities in Massachusetts., Rhode Island, New Hampshire, Vermont, and Connecticut. We work with the SBA and private-sector lenders (primarily banks) to provide financing to small businesses.
Typically, 504 project financing includes a loan secured with a senior lien from a Banker/Lender covering up to 50 percent of the project cost, a loan secured with a junior lien from Bay Colony (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. The latter amount can be in the form of cash into the project or, if an expansion project, existing equity in the project real estate.
SBA 504 Loan at a glance
| Maximum Project Size | None |
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| Maximum 504 Debenture (our piece of the total financing package) | $5 or $5.5 million, depending on whether your business meets an approved public policy goal or is classified as a small manufacturer (NAICS codes beginning with 31, 32 or 33) |
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| Typical Financing Structure | 50% Bank Financing, 40% 504 Financing, 10% Borrower’s Equity |
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| Minimum Equity Requirements | Generally, 10% is standard, 15% if you have not owned the business for two or more years (Start-up); 15% if the real estate is considered special use (ex. skating rink, hotel); 20% if the project is both a start-up and special use. Note: seller financing of all or part of the equity requirement may be allowed if certain conditions are met. Call for details. |
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| Loan Fees | Approximately 2.65% of debenture amount, which can be rolled into the loan. Legal costs for the debenture are typically $2,000 to $3,000 depending on the loan size, and can also be rolled into the loan. |
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| Bank Participation Fee | One time 0.5% of Bank Loan |
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| Occupancy Requirement | Owner must occupy at least 51% of an existing building. For new construction, owner must agree to occupy 60% of the building with plans to occupy 80% within 10 years. |
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| Personal Guarantees | Required of all owners of 20% or more of the operating company or real estate entity. |
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| Approval Limit | The approval is good for 48 months |
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| Assumable | Yes, prepayment penalty is waived, a small assumption fee is usually charged (e.g., 1.0% of loan balance). Note: the buyer is expected to be as strong financially as the seller. Alternatively, the buyer can apply for a new 504 loan. |
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| Refinance Existing Debt and Borrower’s Cash Injection | Yes, with some requirements. Call us to discuss this. |
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| Type of Business | Must be for profit (with a few exclusions) |
Learn more
Maximum debenture
The size of your project is not limited, but most projects, when considered in their entirety fall between $250,000 and $12,500,000. The maximum SBA debenture varies between $5,000,000 and $5,500,000 depending on your industry type and certain public policy goals. The maximum debenture for “Small Manufacturers” is $5.5 million. A Small Manufacturer is defined as a small business concern that has: Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and all of its production facilities located in the United States.
What funds may be used for
Proceeds from 504 loans must be used for fixed asset projects such as: purchasing or refinancing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing machinery and equipment.
The 504 Program cannot generally be used for working capital or inventory, consolidating debt, or repaying debt.
Terms and interest rates
The fixed interest rate on a 504 loans is established at an increment above the current market rate (at the date the debenture is sold) for five-year and 10-year U.S. Treasury issues. Maturities of 10 years (Machinery and equipment) and 20 (real estate) years are available for 504 financing.
Collateral
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.
Eligible businesses
To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $15 million and does not have an average annual net income in excess of $5.0 million after taxes for each of the preceding two years. Loans cannot be made to businesses engaged in speculation or investment. You can learn more by reviewing our general eligibility guidelines, or determine your eligibility using our interactive Eligibility Wizard.