The Small Business Administration (SBA) 504 Loan Program was initiated as a way of kickstarting economic development within communities.
SBA 504 loans are backed by the government and allow businesses to buy real estate and fixed assets, financing up to 90% of the purchase through the loan, but putting in 10% themselves – for up to 10 or 25 years, at especially low rates, from 2.5%.
There’s a catch, right?
Sort of. You can only use an SBA 504 loan for certain expenses. SBA 504 loans also incur fees (including guaranty fees), which most business loans don’t.
If you have the funds to qualify though, it can be worth your while – you can borrow up to a maximum of $5.5 million for up to 10 or 25 years. If you’re buying equipment, you have 10 years; if it’s real estate, you have 25 years.
Know all this and just want to know how to get your hands on the money?
OK. The first thing you need to know is that it’s not that easy.
In the first place, SBA 504 loans are loans of last resort, so you don’t just stroll in with a project and stroll out with a check. There is a whole raft of eligibility criteria to meet first, and it’s fair to say that the qualification process is the hard part.
Phase #1 – Getting in the door
- First, you have to be a business owner with funds.
- Second, you have to know what you need the money for – investing in either new facilities, premises, equipment, or other fixed assets. Get your financial proposal together.
- Shop it round every bank you know. Last resort, remember, not first choice, so there must be an evidence trail of you attempting to get the project funded through conventional lending.
- With rejection on all sides, check whether you’re eligible for an SBA loan. We’ll cover eligibility criteria in a second.
- Find yourself a local certified development company (CDC) and fill in a loan application.
- If your application is approved, you then make a down payment of between 10-20% of the total cost of the project, right then and there. Your ability to do that is as much an eligibility criterion as anything else.
- The CDC will then provide up to 50% of the projected costs, and the SBA will deliver up to 40%.
- You then use your own funds, along with the funds contributed by the CDC and the SBA, to invest in the fixed assets you specified were the reason for the loan – and no other assets.
It’s worth noting that the simple business of ‘applying for a 504 SBA loan’ doesn’t even come into the equation until point 5 on the checklist – after you’ve tried to get traditional funding everywhere you can possibly think of – and have evidence that you’ve done so.
So about those eligibility criteria…
OK – before you try and get an SBA 504 loan, you have to meet the program’s criteria. These are very strict, and break down like this:
- Your business must have a tangible net worth of $15 million or less.
- Your business must have an average net income of $5 million or less (after federal income taxes) for the two years before you make the loan application.
- The business must be run for-profit, be in active operation, and can't be engaged in speculation.
- Net worth <$15 million.
- Net income after tax <$5 million for two consecutive years before you apply.
- For-profit, active business, not in the speculation game.
You knew there would be.
If you run a medium or large company, or every $65,000 guaranteed by the SBA, you must create 1 job. Alternatively, if you run a small business, you must create 1 job per $100,000 of guaranteed funding.
So – say these criteria have stopped you dead in your tracks. Get up, you’re not dead yet. There’s another way to get an SBA 504 loan, which is if your business meets community development or public policy goals.
What the heck are those? The SDA has a list for you. If your business involves:
- Improving, diversifying or stabilizing a local economy
- Stimulating other business development
- Bringing new income into a community
- Revitalizing a business district of a community
- Expanding exports
- Expanding women-, minority-, or veteran-owned businesses
- Aiding rural development
- Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports)
you might still be able to qualify for an SDA 504 loan.
Remember, to qualify, you also have to be able to put up 10% of the cost of the project, more or less without blinking or endangering your company.
The assets or real estate you intend to buy will be used as the security for the loan, and personal guarantees will be necessary from anyone who owns more than 20% of your company before you’ll be allowed to fully apply for the loan.
So the road to applying for an SBA 504 loan is both costly and complex to navigate. And then there are limits on what you can use the money for.
SBA 504 loans can only be used to invest in fixed assets, like real estate and equipment. You can buy a new building, improve or expand the one you have, or kit it out with new equipment if you need it. And then create or retain 1 job per $65,000 or $100,000 dollars of secured funding you get.
Alright already – how do you get your cash?
Assuming you’ve met all the necessary criteria, tried to get traditional funding from every bank imaginable and been refused, then and only then might you be eligible to apply for an SBA 504 loan.
Phase #2 – The SBA 504 loan application process
When applying for an SBA 504 loan, you’re going to need both a CDC and a loan provider approved by the SBA.
Here’s how you go about applying.
1. Know your investment.
Before you try to convince the SBA to give you money, have an investment identified, and understand what you want to do with it.
2. Get your paperwork in order.
Your SBA-approved lender will need to see a lot of paperwork before they approve your loan. You’ll need:
- The business's balance sheet to prove you meet the for-profit, active, and net income requirements.
- 2-3 years of business tax returns to prove your company’s net worth meets the SBA requirements.
- A full breakdown of how the company ownership is divided.
- Financial records for anyone who owns 20% (or more) of the company, to confirm there is no hidden stash of available funding you could access, rather than using the SBA 504 loan.
- 2 years of payroll records to prove you can meet the job creation requirement of the loan.
3. Find your CDC.
Find a CDC in your area. If your application is successful, they will provide 40% of your overall financing costs. If your bank is already an SBA-approved lender, they may be able to recommend a local CDC.
4. File your application with the CDC.
File your loan application. It will be put through a full underwriting process.
5. Find a conventional SBA lender.
Find a commercial bank to underwrite your contribution to the project. This cannot be your CDC.
6. Apply for the SBA portion.
In partnership with your conventional lender, file an application for the SBA portion of your project’s financing.
7. Close on the loan.
Once you’re approved by both the CDC and the conventional lender, you can close on your loan. Then follows the process of putting up 10% of the project funding, and getting the rest via the CDC and the SBA.
In total, the time required to get approved for an SBA 504 loan is usually around six months. After approval, it can take 30-45 days to secure funding, so while it’s wise to have teams on standby to push ahead with your investment as soon as it becomes possible, it’s not sensible to jump the gun.
If you do want to secure your funding faster than the usual 30-45 days, try to get prequalified with a CDC and/or a conventional lender.
The SBA 504 loan is not meant to be an easy thing to apply for. It’s meant to let the government be able to justify giving businesses a lot of money, so the criteria are always going to be strict.
But if you compare the 6 months or so of active application against the criteria that allow you to apply in the first place – in particular, the search for traditional funding before you go down the SBA route – the actual application process is relatively clear.