The SBA 504 Loan Program provides economic development financing that is designed to encourage private sector investment in fixed assets, the results of which increases productivity and creates new jobs. The local tax base is also improved by way of adding assets on which taxes are based. The program provides long-term, low down payment, reasonably priced fixed-rate financing to healthy and expanding businesses that have the probability of creating new jobs.
A Certified Development Company (CDC) is a community-based company approved (certified) by SBA to promote economic growth within its area of operations.
The role of a Certified Development Company (CDC) is to:
- Stimulate the growth and expansion of small businesses primarily through financial assistance; and
- Offer the SBA 504 Loan Program to eligible small businesses through a full-time professional staff.
The SBA 504 Loan Program benefits:
- The local economy through job creation.
- Small expanding businesses by reducing equity requirements and providing high leverage financing over long terms.
- Local government through an increase in the tax base.
Source of Program Funding
The SBA 504 Loan Program is funded through the sale of Certified Development Company (CDC) debentures that are fully guaranteed by SBA. Private investors that are looking for fixed income streams guaranteed by the Fed find this investment attractive. Examples of private investors include pension funds, life insurance companies, large banks, and individuals under certain circumstances. The source of program funding is entirely private. The Federal Government is a guarantor only. Program fees charged to the Program’s participants reimburse the Federal Government for the subsidy expense associated with the guaranty. Bank and non-bank first mortgage lenders, Certified Development Companies, and the borrowers are the source of Federal subsidy reimbursement. This is a no cost program to the Federal Government.
The source of loan funds under the SBA 504 Loan Program is important to the Program’s existence. Most programs requiring continuing Federal subsidy do not enjoy longevity and suffer budgetary risks. The SBA 504 program is not such a program. Given that the source of funding for the program is private and that any Federal subsidy expense is reimbursed by the program participants, there has been little difficulty in raising support in Congress for this well accomplished economic development program.
No, you should not be concerned about the availability of loan funds under this Program. The SBA 504 Loan Program is funded through the sale of debentures to private investors. The debentures are guaranteed with the full faith and credit of the U.S. Government. Governmental guarantees for the 504 debentures are currently under a continuing Congressional resolution. The Federal subsidy for the Guaranty is underwritten and funded by fees charged to the Program’s participants rather than the Fed. Funding for the program is abundantly available with no risk to the Federal Government. Investors find these securities attractive in light of the federally guaranteed rate of return that is competitive among-fixed yield investments.
SBA’s role in accessing funds under the 504 Loan Program is to guarantee the debentures being sold to private investors. Private investors find comfort in knowing that the yield from their investment is guaranteed by the Fed.
BFC’s role in accessing funds under the 504 Loan Program is to issue the debenture that is guaranteed by SBA. Each month, 300 Certified Development Companies from various communities in the United States pool and sell these Federally insured debentures to private investors. The Certified Development Company processes loan applications through the U.S. Small Business Administration. The Certified Development Company also closes and services its loans to various borrowers.
To be eligible for a SBA 504 Loan, a small business applicant must:
- Be an operating business.
- Be organized for profit.
- Be located in the United States.
- Have a tangible net worth less than $15 million, and have an average net income, after Federal income taxes, of less than $5 million for the preceding two years. Industry size parameters also apply.
- Be able to demonstrate a need for the desired credit.
The following businesses are ineligible (13CFR 120.110)
- Non-profit businesses (for profit subsidiaries are eligible);
- Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies);
- Life insurance companies;
- Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
- Pyramid sales distribution plans;
- Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
- Businesses engaged in any illegal activity;
- Private clubs and businesses which limit the number of memberships for reasons other than capacity;
- Government-owned entities (except for businesses owned or controlled or by a Native American tribe;
- Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or indoctrinating religion or religious beliefs, whether in a religious or secular setting;
- Consumer and marketing cooperatives (producer cooperatives and eligible);
- Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
- Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or crime of moral turpitude;
- Businesses in which the CDC or any of its Associates owns and equity interest;
- Businesses which present live performances of a prurient sexual nature; or derive directly or indirectly more than 5% of their gross revenue through the sale of products or services, or the presentation of any depictions or displays of a prurient sexual nature;
- A business or applicant involved in a business which defaulted on a Federal loan or Federally assisted financing resulting in a loss to the government. A compromise agreement shall also be considered a loss;
- Businesses primarily engaged in political or lobbying activities;
- Speculative business (such as oil wildcatting).
Yes, there are restrictions. Examples include:
- A purpose that does not benefit the small business.
- Investments in real or personal property acquired and held primarily for sale, lease, or investment.
- General refinancing. However, funds can be used to term-out debt obtained in anticipation of the 504 project which would have been eligible for 504 financing otherwise.
- Payments or distributions to Associates of the applicant business.
Yes, farm related businesses are eligible. Federal financial assistance to agriculturally oriented enterprises is generally made by the United States Department of Agriculture (USDA), but may be made by SBA under the terms of a Memorandum of Understanding between SBA and USDA. Farm-related businesses that are not agricultural enterprises are eligible businesses under SBA’s business loan programs. Financial assistance under the 504 Loan Program is only available for facility enhancement such as fencing, diking, construction of silos, barns, hog and dairy facilities, and farm machinery and equipment with the required economic life span. All farm enterprises are subject to the same eligibility rules as other applicants.
NOTE: Agricultural Enterprises include businesses engaged in the cultivation of soil, produce of crops, and livestock. Farm-Related Businesses are those that supply goods and services primarily used in connection with farming.
Yes. SBA will give special consideration to a small business owned by a Veteran or, if the Veteran chooses not to apply, to a business owned or controlled by one of the Veteran’s dependents. If the Veteran is deceased or permanently disabled, SBA will give special consideration to one survivor or dependent. SBA will process the application of a small business owned or controlled by a Veteran or dependent promptly, resolve close questions in the applicant’s favor, and pay particular attention to maximum loan maturity. For SBA loans, a Veteran is a person honorably discharged from active military service.
The applicant, including an Operating Company, must be creditworthy. Loans must be sound as to reasonably assure repayment. SBA will consider:
- Character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its Associates, and guarantors.
- Experience and depth of management.
- Market demand for the borrower’s product or service.
- Past earnings, projected cash flow, and future prospects.
- Ability to repay the loan with earnings from the business.
- Sufficiency of invested equity to operate the business on a sound financial basis.
- Potential for long-term success.
- Nature and value of collateral (although collateral will not be the sole reason for denial of a loan request).
- The effect any affiliates may have on the small business applicant.
BFC is certified through SBA to administer the 504 Loan Program in California.
Fees and Various Other Disclosures
Yes, there is an origination fee on a SBA 504 Loan. The origination fee is equal to 1.50% of the net Debenture amount that is in most cases 40% of the total project cost. The fees are included in the loan you receive and cannot be paid out of pocket.
Debenture soft costs are fees associated with the SBA 504 loan. These costs include the origination fee of 1.50%; the funding fee of ¼ of 1% and the underwriter’s fee of 1/2 of 1%. These fees are financed into the project and paid from the loan proceeds at the time the loan is funded.
Miscellaneous billings are charges against the application deposit account. These billings reimburse BFC for expenses incurred during the course of its activities.
The interest rate under the SBA 504 Loan Program is set at the time the Debenture is sold to the private investor. The interest rate is typically tied to the ten-year Treasury bond rate. The spread over the Treasury bond rate is roughly 2%.
Yes, there is a pre-payment penalty during the first half of the term on a SBA 504 Loan. The penalty begins at the note rate and decreases by 1/10 each year until it is zero at the end of the tenth year.
The Application Deposit Agreement is an agreement between BFC and the applicant. This Agreement requires a $2,500 deposit to be used to pay for costs incurred by BFC during the application and closing process. If the application is not approved, the deposit is refunded to the applicant net of expenses to that point. If the application is approved by both BFC and SBA but the applicant elects to withdraw the application, then the deposit is non-refundable. Once the application has been approved, BFC will use this deposit to cover direct costs such as legal fees, Federal Express charges, credit reports, title and recording costs, copies, etc. Any funds remaining after closing will be returned to the applicant with a settlement statement identifying how funds were used.
The Application and Checklist
Under the SBA 504 Loan Program, all applicants must apply through a Certified Development Company (CDC). The CDC prepares the application and works with SBA through the application and closing process. Once the loan is closed, the CDC services the loan throughout its term, ensuring that the applicant complies with all provisions outlined in SBA’s Authorization.
The requirements for applying for a SBA 504 loan through BFC are noted below:
- Furnish BFC with all of the items identified on the Application Checklist.
- Return the Application Deposit Agreement with the Application Deposit of $2,500.
Please email firstname.lastname@example.org.
Forms referenced on the Application Checklist are provided online.
If you have questions while working through the Application Checklist, you can either call the BFC office at (800) SBA-REAL, or e-mail your questions to us at Carly@BFCFunding.com.
The Approval Process
Within three business days of submission, you will be advised whether or not your application has been accepted for processing. If your application is incomplete, a description of the deficiencies will be sent to you by letter.
Once your application has been accepted for processing, your request will be processed and forwarded to BFC’s Loan Committee and SBA within ten business days. Typically, SBA will reach a decision within five business days of receiving your application from BFC.
Once BFC has received SBA’s decision, you will be notified by phone or email.
If SBA approves your request, they will issue an Authorization outlining the terms and conditions of their approval. The Authorization is issued to BFC. Once BFC receives the Authorization, BFC will proceed with closing the loan.
If you disagree with the decision of either BFC or SBA, you may appeal by letter to BFC. BFC will then present your appeal to the appropriate approval body and will notify you of the outcome by letter.
The Closing Process
The closing process for a SBA 504 Loan is as follows:
Step 1: The terms of the SBA Authorization are reviewed in detail. The borrower and participating private lender are given a closing checklist. Timelines relating to the gathering of necessary documentation are established. A closing date is determined in most instances.
Step 2: The bank closes its permanent and interim loans which result in the borrower acquiring title to the project assets. Once the bank has closed its loans, copies of its loan documentation and title work are provided to BFC. The balance of the bank’s checklist items are supplied to BFC. The balance of the borrower’s checklist items are to be supplied as well.
Step 3: Once BFC has received all of the checklist documents from the bank and the borrower, a final closing date is established.
Step 4: The SBA 504 loan is closed. Loan funds are not available to this point.
Step 5: BFC’s Attorney reviews the executed loan document and issues a legal opinion on which SBA relies.
Step 6: The loan file and legal opinion are forwarded to SBA’s legal division for final review. SBA completes its legal review of the executed loan documents and legal opinion provided by BFC’s Attorney.
Step 7: SBA forwards appropriate documentation to the Federal government in Washington D.C. to effectuate the sale of the 504 debenture. Shortly thereafter the 504 loan is priced and funded.
Step 8: The loan proceeds are wire transferred to the participating bank to pay down its interim loan. The loan transaction is complete at this point.
Typically, 45 days will expire from the time that BFC receives all of the closing checklist items to the sale of the 504 debenture and funding of the 504 loan.
The Funding Process
Nothing is required of you during the funding process. Once the loan is closed, documents are forwarded to SBA. The rest happens automatically with no involvement from you or the interim lender.
After your closing documents have been approved by SBA’s legal division, SBA schedules your loan for the debenture sale. Once priced and sold, the funds are wired to the participating lender to pay-down its interim loan. At this point, the funding of the loan is complete.