504 SBA Loan Program

Many successful small businesses, at some point in time, will need money to expand their business for purchasing, leasing, or building.  The U.S. Small Business Administration (SBA) Certified Development Company loan program is a long-term financing tool for economic development within a community.  The 504 SBA loan program provides start-up and growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

The Purpose of 504 Program

Certified Development Companies (CDCs) are nonprofit corporations that facilitate the 504 SBA loan program and are set up to contribute to the economic development of its community.  CDCs work with the SBA and financial institutions to provide financing to small businesses.  The 504 SBA loan program is designed to get below market fixed-rate financing in the hands of small business owners.  It is essentially a second mortgage-type product for commercial real estate.

Who is Eligible for a 504 SBA Loan in Wisconsin?

Over 90% of small businesses are eligible for a 504 SBA loan. Some of the requirements to be eligible are as follows:
  • Must be a for-profit business
  • Operating in the United States
  • Must be an eligible type of business
  • Be of good character
  • Have the ability to repay the loan
Loans will not be made to businesses engaged in speculation or invested in rental real estate. Loans are also not eligible for businesses when the owner or individual is sufficient enough to provide their own financing.

Proceeds Must be Used for Fixed Asset Projects

Proceeds from a 504 SBA loan must be used for fixed asset projects such as purchasing land and improvements including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term useful life machinery and equipment.

What the 504 SBA Loan Cannot be Used For

The 504 SBA loan cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.  It is primarily designed to get fixed rate money in the hands of small businesses that are financing owner-occupied real estate.

Aspects to a 504 SBA Loan

There are three aspects to a 504 SBA loan:
  •  First, there is a mortgage that is made by a private financing institution, usually a local bank that covers up to 50% of the project cost.
  • In addition, there is a second mortgage for up to 40% of the project that is made by a CDC and guaranteed by the SBA.
  • Finally, the third aspect is a 10% to 20% down payment that is provided by the borrower.SBA Loan Structure
The SBA requires the down payment on behalf of the borrower to make sure that they have a stake in the business.  The second mortgage portion, for up to 40%, has a 100% guarantee from the US Government on it.  Therefore, that percentage is sold by the development companies to investors at below market fixed rates.  The maximum debenture is typically about $1.5 million, although in some cases the debenture can be as high as $4 million if the borrower is a manufacturer. The two basic maturities of the 504 SBA loan program are either 10 years or 20 years.  The loans do amortize over that period of time and there are some fees involved.  There is an upfront fee that is paid by the borrower at the time the loan is funded.  There are also fees at the time of funding that are included in the loan amount and there is an ongoing monitoring fee that is paid as part of the monthly loan payment. If you need any legal assistance regarding your small business contact one of our Green Bay Attorneys today by calling 920-499-5700. Helpful Link: https://www.sba.gov/category/navigation-structure/loans-grants/small-business-loans/sba-loan-programs/real-estate-and-eq  

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