SBA expanded the definition of “small business” several years ago so now more businesses qualify for financing assistance from the SBA 504 program. Many small business owners are surprised that “small” is not as “small” as they expected. In the 504 program, a business is small if it has a tangible net worth less than $20 million and an average net income less than $6.5 million after taxes for the preceding two years.
BEFCOR has assisted companies with as few as 1 employee and those with more than 100 employees. Some of our borrowers have 1 owner while others have 5, 10 or more. We work with borrowers with sales less than $100,000 as well as with others that have sales over $50 million. We will gladly help you determine if your business meets SBA’s definition of “small.”
SBA loans are available nationwide and are offered by organizations like BEFCOR that are called Certified Development Companies.
In North Carolina, BEFCOR assists businesses from the majestic mountains in western North Carolina to the beautiful coast, and from the Virginia border to South Carolina. In fact, we can also lend in the South Carolina counties of York, Lancaster, Chesterfield and Chester. Many of our borrowers are located in areas where we do not have an office.
SBA 504 loans work in partnership with other loans, generally provided by a bank or private lender. Working together, the bank and BEFCOR as the SBA lender usually finance up to 90% of a business’ project (see below for which costs can be financed with SBA 504 loans).
SBA 504 loans finance up to 40% of a fixed asset project. A bank or other private lender usually provides approximately 50%. The small business normally provides the remaining 10%. These percentages can change for start-ups, businesses less than 2 years old or projects with special purpose facilities, such as hotels, vineyards and facilities with swimming pools.
Below is an example of a project and how we might structure a loan request:
Project cost| Purchase of Land and Building | $975,000 |
| Machinery and Equipment | $25,000 |
| TOTAL | $1,000,000 |
Proposed Financing:
| Your Bank | $500,000 |
| BEFCOR SBA 504 Loan | $400,000 |
| Borrower Contribution (down payment) | $100,000 |
| TOTAL | $1,000,000 |
The bank or other private lender determines the rate and term of its loan (within SBA’s guidelines), and that loan is usually secured by a first lien on the land and building. SBA/BEFCOR usually takes a second lien or position. The SBA 504 loan has 10, 20 or 25-year terms and a fixed interest rate.
You may find it interesting that SBA 504 loans are not technically funded by “the government.” Instead, government-guaranteed bonds are sold so organizations like BEFCOR work with small businesses. These bonds or “debentures” are sold in the financial markets on a monthly basis.
So why is SBA involved? Because SBA guarantees payment of bonds, SBA has oversight for the program and its parameters. SBA has oversight for the program and its parameters, and SBA regulates BEFCOR. We can provide additional details that will simplify the process. The great news is that billions of dollars are loaned to growing small businesses each year through this program.
- Land: Valued at cost (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 existing building(s)
- Expansion, renovation or conversion of existing building(s)
- Construction of new building(s): Ground-up construction is eligible. Additionally, a contingency reserve for cost overruns, not to exceed 15% of construction costs, may be included in the project costs.
- Refinance of existing loans: Loans secured by fixed assets and whose original purpose was substantially (75%) to acquire fixed assets eligible for the 504 loan program.
- Purchase and install machinery and equipment: Equipment with a useful life of at least 10 years. Furniture, fixtures and equipment with a useful life of less than 10 years may be included when “essential to and a minor part of” the 504 project.
- Professional fees: Title insurance, architectural fees, engineering fees, appraisals, surveys, environmental studies, utility access charges and other fees.
- Interim interest and financing costs: Points and interest paid to a lender during the interim or construction phase of the project are eligible 504 project expenses
The business or the owner(s) contributes 10% or more of the total project costs. The cost of an appraisal can usually be included in the financing.
When the business is new (less than 2 years of operating history) the down payment requirement is increased to 15% of the project amount. Additionally, occupancy, purchase price, and other details should be included.
If a new facility is being constructed, the business must initially occupy 60% of the total square footage, with projections to increase to 80%.
SBA establishes the guidelines for fees for SBA 504 loans. These fees include a CDC processing fee, a funding fee, an underwriting fee and a fee for an SBA-designated attorney. These fees are customarily included in the SBA loan unless the borrower elects to pay some of the fees upfront. It is important to note that the fees, even though there are several, usually have only a small impact on monthly payments. These fees are offset by the substantial benefits of the program – and loan payments, even with the fees, may be lower than other financing options. In fact, the fees for SBA 504 loans are often lower than for similar programs.
The bank pays an SBA fee.
Our staff can prepare an estimate of fees based on your project cost. The benefits usually outweigh the small impact of fees.
Yes. There is a pre-payment penalty on SBA 504 loans based on a declining scale for the first half of the loan term.
We maintain accurate information on prepayment penalties and will gladly describe how it is calculated, demonstrating how it reduces each year – no one understands this as well as CDC experts, including all of us on the BEFCOR team. Once borrowers fully understand, the prepayment penalty is rarely a concern AFTER we have equipped the borrower with the details. You can rely on us for accurate information.
The SBA 504 program is designed to ensure small businesses have access to capital so they can grow and expand – and create and retain jobs. SBA’s requirement is that one job must be created or retained for every $90,000 of 504 loan proceeds – or one for every $150,000 of SBA 504 loan dollars if the business is a small manufacturing company.
SBA recognizes that economic development is not only measured in terms of new jobs. If the applicant cannot create the jobs required by SBA, there are other economic development objectives the company can satisfy. For example, businesses owned by minorities, veterans and women get a waiver of the job creation requirement. Businesses located in revitalization districts, labor surplus counties or rural areas can also receive waivers. BEFCOR’s staff can help you determine which goals your business meets.
- Good character, management expertise and the commitment to success.
- Adequate down payment for the project and sufficient funds to operate the business on a solid financial foundation. 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 or information that explains the small business and its growth plans.
BEFCOR’s team works with business owners to prepare the forms – when possible, we will even draft the forms. While we will need some information from the business owner, we work with the bank partner and the small business owner to ensure our efforts are not duplicative.
When you work with BEFCOR, you benefit from our team’s experience, which spans more than 100 years. We work diligently to minimize the additional paperwork and stress – we know that borrowing money is not what most business owners enjoy most.
Our borrowers often say they are surprised that the process is seamless. In fact, we have many borrowers who have returned for additional loans as their business has continued to grow. Repeat borrowers are the best compliments!
SBA 504 loans provide valuable access to capital for small businesses including:
- longer term or lower rate than a bank can offer
- lower down payment required by a conventional lender
- working capital savings and better cash flow as a result of lower down payment
- earlier ability to grow
- prior credit challenges may be less of an issue and will not affect the interest rate
- better terms than what is available from a bank
- option for businesses in industries that banks may be reluctant to consider
There are many scenarios in which the 504 program’s benefits can make a significant impact on a small business. Businesses searching for long-term, fixed interest rates to stabilize cash flow are excellent candidates for the 504 Loan program.