Successful, growing businesses often face a difficult dilemma when trying to expand. A business may want to improve an existing facility, purchase or construct a new facility, or acquire expensive fixed assets such as heavy machinery or equipment. But growing businesses often have limited cash reserves because rising inventory levels, increased staffing and higher accounts receivable levels consume cash. What options are available when a company doesn’t have the typical 20 percent or more down payment typically required for financing a new building or expanding an existing facility with a conventional bank loan? A Small Business Administration (SBA) 504 loan might be the answer.
The SBA 504 loan program is a program backed by the federal government that allows qualified companies to finance a higher percentage of a qualified fixed asset purchases, real estate purchases or real estate improvements than would otherwise be available from a typical bank loan. In many cases, the 504 program will allow a company to finance up to 90 percent of the cost for these acquisitions.
How Does it Work?
A non-profit Certified Development Company (CDC), certified and regulated by the SBA, works with your local participating bank to provide a financing package to meet your needs. This will typically consist of a bank loan for 50 percent of the cost and an SBA/CDC loan for up to 40 percent of the cost. The terms of the bank loan are set by the bank and are usually similar to other loans offered by the bank. The SBA/CDC portion is either a 10-year or 20-year fixed rate loan, with the rate determined at the time of the SBA debenture auction. The fees for the bank portion are determined by the bank while the fees for the SBA/CDC portion run about three percent of the SBA/CDC amount. The SBA/CDC fees may be financed with the loan.
What are Eligible Uses?
The SBA 504 program may be used toward the purchase or construction of owner occupied commercial real estate for improvements, modernization or renovations to existing owner occupied commercial real estate, or toward the purchase of long-term machinery and equipment. A 504 loan cannot be used to finance non-owner occupied investment real estate, working capital, inventory or refinancing or consolidation of debt.
What are the Qualifications?
In addition to usual credit underwriting guidelines such as cash flow of the business, strong management and a feasible business plan, the SBA has some additional criteria an applicant must meet. The applicant must operate as a for-profit company doing business in the United States. The company and its principals must have a tangible net worth of less than $15 million and average net income less than $5 million after taxes for the preceding two years. The applicant must not have the resources to finance the project without SBA assistance. The vast majority of business types are eligible, but there are some businesses that are excluded from eligibility, such as financial institutions, real estate investment businesses and other speculative businesses.
One of the goals of the SBA is to promote employment and economic development, so the SBA seeks to document that the loan will create or retain at least one employee for every $65,000 in CDC/SBA funds, or in the case of a small manufacturer, one employee for every $100,000 in CDC/SBA funds.
How Much Can I Borrow?
Loan amounts can range from as little as $200,000 up to the maximum allowable SBA financed portion, which varies between $4 million and $5.5 million, depending on the industry and whether the funds are used to meet any public policy objectives, such as an expansion of exports, business district revitalization, rural development or expansion of a minority, veteran or woman owned business.
How Do I Apply?
Begin by speaking with your local banker. Your banker should be able to discuss your situation with you and determine if the SBA 504 program is right for you or if you would be better suited with an alternative loan program. Your banker will work with a CDC to gather all the necessary documentation from you to underwrite and prepare the loan documents. Plan ahead as the process may take 60 days or more, depending on the project and any necessary appraisal requirements.
For more information, visit www.sba.gov or contact your local bank. QCBN
Ryan Glennan, NMLS # 478327, is a vice president of Country Bank specializing in commercial lending and residential construction loans. Country Bank is a full service community bank serving Yavapai County with offices in Prescott, Prescott Valley, and Cottonwood. Please visit www.countrybankaz.com or call 928-443-9595 for more information.
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