The Small Business Administration (SBA) 504 loan is a helpful and competitive small business loan option for companies that are looking to grow. SBA 504 loan gives small businesses the financial resources they need to acquire commercial assets such as real estate and purchase or improve equipment, machinery, or new buildings! A key benefit of SBA 504 loans is that SBA 504 loans require substantially less down payment from small businesses when these businesses borrow money compared to most conventional bank loans. 

How SBA 504 Loans Work

If you have a commercial acquisition need, you can apply for a SBA 504 loan through Certified Development Companies (CDCs) such as Business Finance Capital (BFC). CDCs are SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA. When you apply for a SBA 504 loan, a CDC will find a partnering lender such as a bank to loan out 50% of the project. A CDC will make a loan for 40% of the project. The borrower, which is oftentimes a business owner, will contribute 10% of the project while committing to personal guarantees to pay back the loan.

What are Personal Guarantees?

When processing an SBA 504 loan for our clients here at BFC, we’re often asked about “personal guarantees”, and what they mean in relation to the loan. In simple terms, a personal guarantee is a legal document that ensures the lender or business owner has the funds necessary to repay the cost of the loan should it go into default. The “guarantor” (the one receiving the loan) agrees that a lender has the right to pursue loan repayment directly from their personal net worth if the loan defaults.

Personal guarantees are required for any business owner who owns more than 20% of their business. If no individual owns more than 20%, the majority owners will be required to be personal guarantors. In addition, each spouse of the personal guarantors who owns 5% or more of the business must also personally guarantee the loan if the combined ownership of both spouses is over 20%.

The SBA requires guarantors’ non-owner spouses to sign only appropriate collateral documents. Fact is, all SBA loans require a personal guarantee and the SBA 504 loan is no different in that regard.

SBA 504 Loan Structure

As stated above, this is how a SBA 504 business loan is structured:

SBA 504 Loan Structure

  • The first part is a conventional loan from a financial institution for up to 50% of the total loan amount.
  • The second part is an SBA loan of up to 40% of the total loan amount, facilitated by a CDC such as BFC.
  • The last is a 10% payment by the business owner.

Lenders are motivated to work with CDCs on SBA 504 loans because their interests come first and are protected Since lenders such as banks only finance 50% of the total loan amount, their risk is very well covered. This reduced lender risk is why it’s likely that an SBA 504 loan will give you better financing terms than you would find anywhere else. 

At BFC, we’re here to help answer any additional questions you may have about personal guarantees and would be happy to walk and talk you through the process. To learn more, call 1-800-SBA-REAL today!