There are many benefits for small businesses to apply for an (SBA) 504 loan such as lower down payment deposits on the loan, higher credit limits, competitive interest rates and many others that a small business otherwise would not be able to get through a traditional loan process. This is made possible because the SBA guarantees up to 85% of the loan reducing the risk that private banks take on when they offer loans to businesses taking advantage of the 504 program. In addition to guaranteeing up to 85% of the U.S. Small Business Administration (SBA) 504 loans for lenders, the SBA is taking further steps to reduce the financial risks for lenders. One vital initiative that SBA is taking is requiring the borrower, operating company, and applicable guarantors to provide an annual review to highlight the borrower, operating company, and applicable guarantors’ financial health each year.

The annual review reveals if a borrower is facing financial hardship which helps the lender determine if adjustments to the loan needs to be made. For example, if a borrower defaults on a loan or an obligatory payment such as property tax or commercial maintenance fee, the lender can choose to penalize the borrower by increasing the borrower’s interest rate to over 5%.

The SBA requires borrowers, operating companies, and applicable guarantors to do one or more of the following:

1. Share tax return

SBA 504 Loan Program

For most small business loans, SBA requires that an application for a business loan to contain, among other things, a description of the history and nature of the business, the amount and purpose of the loan, the collateral offered for the loan, current financial statements, and historical financial statements such as tax returns. Tax returns are effective documents to measure whether the borrower has sufficient income to pay its debts because tax returns disclose companies financial information such as their revenue and operating expenses including:

  • Income
  • Expenses
  • Tax liability
  • Gross rents
  • Cost of goods sold
  • Gross profit
  • Capital gain net income
  • Salaries and wages
  • Repairs and maintenance
  • Advertising

By assessing a borrower’s tax return, a lender can see if the borrower is afloat and is financially capable of repaying the loan.

To confirm the accuracy of a borrower’s tax return, SBA also uses Internal Revenue Service (IRS) verification of tax return and financial statement information to detect fraud by program applicants or participants. Source: Fraud Detection in SBA Programs.

Additional information about tax returns:

In order to comply with Section 2202 of the Taxpayer First Act (P.L. 116-25), SBA Lenders submitting an IRS Form 4506-T must obtain the borrower’s and seller’s (as applicable) written consent to the use of the tax return transcript(s) for the purpose of compliance with SBA Loan Program Requirements, including verification of financial information, verification of tax return filing, and verification of tax return information. Moreover, SBA Lenders must obtain the borrower’s and seller’s (as applicable) written permission for the SBA Lender to share the tax return transcript(s) with SBA and its agents for the purpose of compliance with SBA Loan Program Requirements, including discrepancy resolution, lender oversight activities, purchase reviews, complete file reviews, and other SBA reviews. Source: Lender and Development Company Loan Programs. If you have any questions about attaining the borrower’s written consent and submitting a request to IRS, please feel free to get in touch via phone at 1-800-SBA-REAL (722-7325) or contact form.

2. Provide proof of annual property insurance coverage

SBA 504 Loan