Frequently Asked Questions

What can my business finance with a 504 loan?

• Land. The value of the land is determined at cost, if acquired within the last two years, or at the appraised fair market value, if owned for more than two years.
• Site Improvements. Grading, paving, landscaping, curb and gutter, etc. No more than 5% of total project costs can be for "community" (off-site) improvements.
• Purchase of one or more existing building(s). The operating small business must occupy at least 51%, with no time limit imposed for occupying the balance of available space.
• Conversion, expansion, or renovation one or more existing building(s). The cost of improving the spaces to be leased out cannot be included in the 504 Loan Program financing.
• Construction of one or more new building(s). The operating small business must occupy at least 60% of the project, with projections indicating that the small business will need some additional space within 3 years and the reasonable intent that the business will occupy 80% of total space within 10 years. The 504 loan proceeds cannot be used to improve tenant space with any specialized improvements. (A contingency reserve for cost overruns, not to exceed 10% of construction costs, may be included in the calculation of total project costs for the purposes of the 504 application.)
• Acquire, by lease or purchase and install machinery and equipment. The assets must have a useful life of at least 10 years and are at a fixed location. Furniture, fixtures and equipment with a useful life of less than 10 years can be included where these are "essential to and a minor part of" the 504 project.
• Professional fees directly attributable and essential to the project. Title insurance fees, architect fees, engineering fees, any required environmental studies or audits, the cost of a project appraisal, any local government project fees, utility hookup charges; the cost of any survey required to provide clear title; and, related legal and accounting fees.
• Repayment of interim financing costs. Points charged and any interest paid to a lender during the interim or construction phase of the project are eligible 504 project expenses. (Expenses incurred toward the total cost of a project, other than a land purchase, must normally be made within nine months of the date that a completed loan application package is received by BEFCOR.)

What CANNOT be financed with a 504 loan?

• Organization and incorporation costs
• Counseling or management service fees
• Finders fees, broker fees, commitment fees and application fees
• Origination fees on the permanent portion of private sector loans (origination fees on interim or construction financing can be included)
• Working capital needs / requirements, such as the purchase of inventory
• Furniture, fixtures and equipment with a useful life less of than 10 years (although these may be allowed if it can be shown that they are essential to the project and a small percentage of the total project cost)
• Automobiles, buses, SUV's, motorbikes, mopeds, bicycles, trucks and airplanes
• Franchise fees
• Moving costs
• Advertising
• Construction equipment; however, heavy duty equipment integral to a business and meeting the IRS definition of capital equipment is eligible
• Taxes - SBA loan proceeds can never be used to pay past due federal and/or state taxes

Is there a minimum or maximum project size?

Projects can range in size from $150,000 to $12,000,000.

There will be two loans for the project. The bank will provide 50% of the project cost and the 504 loan will provide the amount (usually 40%) remaining after the owners injection (normally 10%).

For manufacturing facilities the 504 loan limit is $5,500,000. Otherwise, the 504/CDC loan amount can be up to $5,000,000.

What businesses are eligible for a 504 loan?

More than 99% of privately held, for-profit companies are considered small businesses for 504 and SBA guaranty loan financing purposes.

BEFCOR is certified by the U.S. Small Business Administration to process any 504 loan where the project is located in North Carolina and the following four counties in South Carolina: York, Lancaster, Chester and Chesterfield..

The following is a list of those small businesses generally considered ineligible for assistance under the SBA 504 Loan Program:

• Nonprofit organizations
• Projects owned by developers and landlords that do not actively use or occupy the asset being purchased (apartment complexes, storage locker businesses)
• Financial businesses primarily engaged in lending (banks, finance companies, factors)
• Consumer and marketing cooperatives (producer cooperatives are eligible)
• Life insurance companies
• Businesses located in a foreign country
• Pyramid sales distribution companies
• Businesses where more than 1/3 of gross annual revenue is from legal gambling
• Businesses engaged in any illegal activity
• Private clubs and businesses which limit the number of members for reasons other than capacity
• Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs
• Businesses where an associate or principal is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude
• Businesses in which a private sector lender or BEFCOR (or any other certified development company) or any of its associates, owns an equity interest
• Businesses which present live performances of a prurient sexual nature, or realize more than 2% gross revenues from the sale of products or services of a prurient sexual nature
• Businesses that have previously defaulted on a federal loan
• Businesses primarily engaged in political or lobbying activities
• Speculative businesses, such as oil wildcatting, etc

Is it difficult to apply?

It's easy to apply. As with any loan application you will need to complete an application and provide certain information about your company and its owners.

How long is the approval process?

Once your completed application and attachments have been received, it will take about one week for our staff to put the application package together and finish the loan committee review. Then your application is forwarded to the SBA; the agency's response time is typically 3 days.

Is my company too big or successful?

504 and SBA guaranty loans are targeted to successful, growing companies since those firms are most likely to create new jobs. Most privately held companies qualify for 504 and SBA guaranty loan financing.

New ventures may qualify for 504 and SBA guaranty loan financing, but unlike established companies, the new enterprise will not have an established history of repayment ability. About 30% of the loans BEFCOR packages are approved for start-up business operations.

The applicant must be a for-profit small business whose net worth does not exceed $7 million and whose after tax income was not in excess of $2.5 million, averaged over the past two years.

How does a 504 loan compare to a 7(a) loan?

Both are SBA guaranteed loans. The 504 loan is a low down payment, fixed rate, long-term loan to assist growing businesses to acquire larger facilities or more equipment. The 7(a) SBA guaranty loan can also be used to finance those costs; however, the down payment is usually higher and the interest rate typically floats based on changes to the prime rate.

Where working capital is needed, the 7(a) SBA guaranty loan would be most appropriate for those purposes.

The 504 loan can now be used for the purpose of refinancing existing debt that was originally used to finance eligible 504 debt (owner-occupied commercial real estate and other fixed assets)

Our loan officers can provide you with the detailed cost comparisons for your project to make sure the best financing vehicle is used.

Down payment requirements

Usually the business contributes 10% of the project costs. If the land is already owned by the business its value can be included as all or a portion of the required equity injection to fund the project.

Where the business is a start-up enterprise (less than 2 years of operating history) then the equity injection requirement is increased to 15% of the project amount.

If the loan will finance a facility having a special or limited use, the equity injection is increased by 5%.

What is the bank's role?

For 504 loans the bank will process the application as it would any loan request. BEFCOR will share its credit underwriting analysis with the bank to accelerate the time to loan approval.

The bank loan officer should make sure all appraisals and environmental reports are ordered naming the bank, SBA and BEFCOR, as intended report recipients.

Once the bank commitment letter is received it is sent to SBA with the 504 application package.

The bank can close the loan using its own loan documents after the SBA has approved the 504 project.

Generally the bank provides all of the funds to complete the project in excess of the owner's down payment during the construction period, based on the SBA agreement to pay down the bank's loan by the amount of the 504 loan.

When the project is completed, as evidenced by a certificate of occupancy, the 504 loan can close. The bank will need to provide copies of its loan documents, documentation of all of the project costs funded and will need to state that no adverse change is evident in the borrower's financial condition.

What will be my interest rate?

We won't know until after the 504 loan has closed. Then the bond results will determine the interest rate that will be in effect.

The funds used to provide 504 loan financing come from the monthly sale of a semiannual coupon bond in New York. The bond is guaranteed by the "full faith and backing" of the US Government (the US Small Business Administration). That federal guaranty makes it an attractive investment for the investors who bid for and purchase these bonds each month. The rate of the 504 loan is determined by the auction results.

The investors realize a premium on these bonds above Treasury issued bonds. Between October 2003 and November 2005, the premium fluctuated between 0.57% and 0.79% above the Treasury bonds.

It is the sale of the bonds at a rate nominally above Treasury bond issues that allows the 504 financing to be at a low, fixed, long-term interest rate.

What are eligible passive concerns?

Potential tax benefits can result.

Ownership by an Eligible Passive Concern (EPC) is permitted for 504 loans. The EPC, a 'passive' small entity or trust can be the borrower and own the project assets included in a loan application. This situation is typical for most of the loans processed by BEFCOR.

The EPC must lease the real or personal property financed using 504 loan proceeds to an operating small business which is substantially owned by the same individuals who own the EPC.

The EPC will show the interest paid on the 504 project and the accrued depreciation on the EPC's tax documents.