Answers for Borrowers
More than 99% of privately held, for-profit companies are considered small businesses for 504 and SBA guaranty loan financing purposes. To be eligible, the business generally must be operated for profit and fall within the size standards set by the SBA. Under the 504 program, a business qualifies as small if it does not have a tangible net worth in excess of $15 million and does not have an average net income in excess of $5 million, after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment.
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
The 504 program is designed to enable small businesses to create and retain jobs. One job must be created or retained for every $65,000 of 504 loan proceeds or every $100,000 for manufacturing companies. The job creation requirements have been waived in certain NC counties. In addition, woman/minority/veteran-owned businesses are exempt from the job creation requirements.
Typically, a 504 project includes the following:
- A loan secured with a senior lien from a private-sector lender (bank) covering up to 50 percent of the project cost,
- A second loan with a junior lien from Capital Partners (Certified Development Company) covering up to 40 percent of the project cost,
- A contribution of at least 10 percent equity by the borrower, with loans for start-up companies or for special purpose buildings requiring an additional 5% (a combination of start-up and special purpose would require an additional 10%).
The 504 portion of the loan cannot exceed $5 million. In addition, a $5.5 million loan is available to small manufacturers whose production facilities are all located in the United States and businesses reducing building energy consumption by at least 10% or implementing plant, equipment and process upgrades of renewable energy sources.
SBA 504 Purchase Program
- 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.)
**The 504 standard program cannot be used for working capital, inventory purchases, debt consolidation or refinancing.**
SBA 504 Refinance Program
- Refinance of existing loans whose proceeds were used substantially (85%) to acquire fixed assets eligible for the 504 purchase program.
- Loan proceeds may also be used to pay Eligible Business Expenses such as building maintenance, equipment purchases, rent, utilities, inventory and other obligations. These expenses must be incurred but not paid prior to the date of the application or come due within 18 months of the date of the application. All proceeds must have been used for the benefit of the small business.
- Proceeds cannot be used for expansion purposes such as equipment, and real estate purchases.
Terms of 10 and 20 years are available. The 504 debentures are sold on the secondary market and interest rates are set at a fixed rate at the time the loan is funded.
SBA establishes the guidelines for fees, therefore fees are essentially the same for NC certified development corporations. These fees include a CDC processing fee of 1.5 percent, a guaranty fee, a funding fee, and an underwriting fee.
Interest rates and fees on the first mortgage are negotiated directly with the lender.
The bank is required to pay to the SBA a ½% fee on the 1st lien loan amount to participate in the program, and this is not included with the 504 loan. CDC shares of SBA fees can be financed with the loan.
There is a pre-payment penalty on the 504 loan based on a sliding scale for the first 10 years on 20 year debenture and the first 5 years on a 10 year debenture. Terms on the first mortgage are negotiated directly with the lender.
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%.
Generally, the project assets being financed are used as collateral. Personal guarantees are required from all principal owners of the business (with ownership of 20% or more). Liens on personal assets of the principals may also be required.
• Good character, management expertise, and the commitment necessary for success.
• Adequate equity investment in the business and sufficient funds to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase).
• Ability to repay the loan on time from the historical or projected operating cash flow.
• Feasible business plan.
BEFCOR will prepare the SBA loan application and any other forms to be submitted to the SBA. There is NO packaging fee.
Is a business more apt to qualify for a SBA loan rather than a conventional loan? What is the difference?
The purpose of a SBA loan is to provide financing for small businesses that are unable to obtain conventional financing appropriate for the business. The SBA provides longer terms, which are often not available on a conventional loan. A borrower may need these terms in order to have sufficient cash flow to pay for the proposed loan payments. Another reason why a borrower may not qualify for conventional financing is because the bank may consider the business to be in an industry which is “too risky”, such as start-up companies or restaurants. Additionally, businesses searching for long-term, fixed interest rates to stabilize cash flow are excellent candidates for the 504 loan program.