LENDER’S FAQ ABOUT THE 504 PROGRAM

SBA 504 Loans an important tool for community leaders (Power Point Presentation)

1. What is the SBA 504 Financing Structure?

To fund the 504 portion of the loan, the U.S. Small Business Administration issues a fully guaranteed Debenture that is sold on the private bond market.

(2) What are the Down Payment Requirements?
Typically, the small business contributes 10% of the project costs. If the business is a startup (when Management has less than 2 years of operating experience), the down payment increases to 15%. If the loan will finance a single use property, the down payment increases to 15%. If the project is for both a single use property and a start-up business, the down payment increases to 20%.

(3) What Businesses are eligible?
The applicant must be a for-profit business whose business net worth is less than $8.5 million and whose after tax income is $3 million or less, on average, for the last two years (size standards as of 8/18/08).

(4) What projects are eligible and what are the costs?
SBA 504 financing is used to acquire, construct, renovate or expand an owner occupied facility.   It can also be used to acquire major machinery and equipment with a useful life of at least 10 years. Through the recent American Recovery and Reinvestment Act, up to 1/3 of project funds can now be used for eligible debt refinancing (fixed asset related debt only).
In addition to the acquisition and construction costs, the "soft costs" (appraisals, environmental, construction interest, closing costs, etc.) can also be financed in the 504 loan. This allows the business to preserve working capital.

(5) What are the occupancy requirements?

(6) What is the project size range?
Project sizes typically range from $200,000 to $12,000,000 with the 504 loan size ranging from $80,000 to $1,500,000 (SBA portion up to $2,000,000 when public policy goals are achieved, and up to $4,000,000 for manufacturers meeting SBA defined NAICS codes, and $4,000,000 for projects achieving certain energy goals). The first mortgage loan can exceed 50% of the project total, which enables larger companies to take advantage of the benefits of the 504 for certain projects exceeding $10million.

(7) What is the Banker's Role?
The first mortgage lender processes its loan as it would any conventional loan request. Southern Development Council and the bank can work together to collect documents from the borrower, and Southern Development Council can share its credit underwriting with the bank. Once approved, the bank will utilize its own loan documents to close their loan.
Appraisals and environmental reports should be ordered naming all parties (the bank, Southern Development Council, and the SBA) with copies provided to Southern Development Council as received.

Generally, the bank provides "interim" or "bridge" financing while Southern Development Council's 504 loan is a permanent take-out loan. Thus, the bank would provide the full 90% financing up front during the construction, renovation, or closing period based on the 504 commitment to take out the applicable portion of the interim financing once the business occupies the property.

To close the 504 loan, the bank will be asked to provide copies of its loan documents, provide copies of its draw schedules (for construction or renovation projects), certify that there has been no adverse change in the borrower's financial condition, and agree to various other provisions such as to provide 60 days advance written notice of default prior to foreclosure proceedings. The participating lender pays a one time participation fee of 50 basis points on their participation amount.  Since your loan is just that, your loan, there are no ongoing reporting or guarantee fee requirements once the 504 portion is funded.

At Southern Development Council, we strive to be the 504 expert and we help ensure that all SBA requirements are met so our lending partners can focus on the bank portion of the loan without having to memorize all of SBA 504 Loan intricacies.

(8) What are the advantages of an SBA 504 Loan?
Advantages for commercial lenders

• Reduce risk on projects - resulting in 50% loan-to-value-ratio

• Fixed or variable rate option on bank loan

• Meets economic development and community reinvestment goals

• Blending rates allows you to compete for strong projects with other lenders and keeps the bank competitive by offering attractive financing for its clients

• Low down payment also allows you to compete for strong projects with other lenders

• Reduces exposure to customer and/or leaves “room” for other loan products

• Better cash flow coverage

• CRA credits

• Bank loan is not guaranteed, therefore not subject to SBA reporting or ongoing fees

Advantages for small business

• Low down payment - helps conserve valuable operating capital

• The 504 has a below market fixed rate - avoids future rate fluctuations, keeps costs of loan low

• Long-term - brings debt service in line with cash flow generated by business

(9) What do I do if I think a project might be a good 504 candidate?

If a project appears to be a good fit for the 504 program, go ahead and call one of our Business Development Officers.  With only a few short questions, they can usually determine if a project is a good fit for the program.  Once determined that a 504 would work, a short list of items will be requested in order to prepare the loan application.  Items needed mirror the information you have or will be requesting in order to underwrite your first mortgage loan.  Again, we can work together to collect documents from the borrower, and Southern Development Council can share its credit underwriting with the bank.  Working together we can ensure the process remains seamless for the borrower and efforts aren’t duplicated.
An application is available for download at our website, www.sdcinc.org. Primary items needed for a formal application will normally include:

• A description of the project with an estimate of the project cost

• If an existing business, completed Federal Income Tax returns, and if available CPA prepared financial statements, and Interim Financial Statements less than 90 days old

• If a start up business, pro forma income statements for the first two years with general assumptions

• Current personal financial statements and complete Federal Tax Returns for all officers and owners with 20% or more ownership in the company

(10) Why should I use Southern Development Council?

Southern Development Council will work with you and the borrower to make the application process as easy as possible. If your customer meets prequalification requirements, Southern Development Council will prepare all the necessary paperwork to obtain an SBA loan approval.

We are a fully autonomous Alabama company celebrating our 27th year of service and are proud to have brought to reality over One Billion Dollars in projects and over 18,000 jobs to our state.  Southern Development Council was the first statewide CDC serving Alabama.  Our Business Development Officers have the experience necessary to deliver prompt, professional service every time you call.  We have a dedicated support staff that includes loan assistants, financial analysts, and credit specialists all waiting to support you and your project. 

Contact us with any questions at 1-800-499-3034 ext 105,