Government Guaranteed Lending

Small Business Administration 504 Loan Program

One thing that most small businesses have in common is the need for long-term financing at affordable fixed rates. This is exactly what the Small Business Administration (“SBA”) had in mind when they designed the SBA 504 Loan Program. At Nova Financial our goal is to originate, close and service your 504 loan.

The SBA 504 Loan Program is a partnership between Nova Financial, Certified Development Company (“CDC”), acting on behalf of the SBA, and the business owner. Under the SBA 504 Loan program, Nova Financial will arrange 50% or more of the total project cost, the CDC will provide a minimum of 40% of the total project and the business owner will generally provide a minimum of 10% of the total project.

Program Description

The United States Small Business Administration (SBA) enables growing businesses to secure long-term, fixed-rate financing for commercial / industrial real estate and/or major machinery and equipment through the SBA 504 Loan Program. The program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, including land, buildings, and major machinery and equipment. The 504 Program gives small business owners access to the same low-cost, fixed-rate, long-term financing that larger businesses might obtain through bond markets.

Below is a summary of the SBA 504 loan programs key points:

The SBA 504 loan program has been used by thousands of businesses to maximize their growth and potential through the acquisition of commercial property and the helpful Staff at Nova Financial are waiting to make your similar dreams a reality.

Benefits

There are numerous benefits to the Small Business Association 504 Loan Program for a Small Business including:

Use of Proceeds

Under the SBA 504 Loan Program businesses can only use the loan proceeds for the following uses:

Unfortunately, the SBA 504 Loan Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.

Terms, Interest Rates & Fees

Spectrum can provide aggressive rates and terms on the first trust deed, because the risk is shared with the SBA.  Some of the clients options, provided by Spectrum, for a first trust deed include but are not limited to variable rates and 1, 3, 5, and 10 year fixed rate fully amortized programs.

Interest rates on the second trust deed portion of the 504 loans are fixed at the time of the debenture sale. The interest rates approximate the current market rate for five- and 10-year U.S. Treasury issues, plus a small increment. Maturities of 10 and 20 years are available.

Fees total approximately 3.5 percent of the debenture and may be financed with the loan. These include a CDC processing fee of 1.5 percent, a guaranty fee, a funding fee and an underwriting fee.

Collateral

In addition to personal guarantees from the borrower, the SBA also requires personal guaranties of all owners of 20 percent or more of the subject business.

Eligibility

To be eligible, a business with its affiliates must be operated for profit and fall within the size standards set by the SBA. The business must also have a tangible net worth of $7 million or less and an average net income of $2.5 million or less after taxes for the preceding two years. The business applicant must be the primary tenant and occupy at least 51% of an existing facility and 60% for new construction. Passive investment companies, non-profit businesses, lending institutions, real estate development companies, and some other enterprises are not eligible for 504 loans. 

Loan Structure

An SBA 504 Loan Program contains the following three parts:

1. First Mortgage - A First Mortgage Loan will be provided by Nova Financial for at least 50% of project costs. It is important to understand that Spectrum provides a note that is separate and carries rate and terms separate from the SBA.
2. Second Mortgage - A Second Mortgage Loan from a Certified Development Company and the SBA, of up to 40% of the project cost or a maximum of $2,000,000 (under special circumstances, up to $4,000,000 is available).  The term of the 504 loan can be as long as 20 years for real estate and 10 years for equipment. The interest rate is fixed for the maturity period. The interest rate is below market, fixed and determined at the time of SBA funding.
3. Borrower Injection - A down payment from the borrower is typically 10% of total project cost. If the business is a new business or the facility is for special usage, the required down payment may be as much as 20% of total project cost. The down payment can be cash, equity in land or building, existing equipment or any other fixed assets that are part of the project.

Sample Project

Purchase of a commercial building for $1,000,000. A SBA 504 Loan would look something like the following:

Collateral

A SBA 504 loan is secured by a lien on the project assets being financed. In addition, personal guarantees of all principals owning more than 20% of the company are required. Life insurance is typically required unless there is a strong management succession plan. If credit is unusually risky, additional collateral may be required.

Fees

Most of the up front fees associated with the 504 Loan Program are included in the loan. However, there are various professional service fees for things such as appraisals, environmental testing and processing fees which are paid by the borrower. All fees are generally added to the 504 loan. While these fees add to the borrower’s cost, the overall result is still a lower interest rate than normally obtainable through conventional financing.

Considerations

The bank loan generally can be prepaid according to terms of the Nova Financial  Lending note. The SBA 504 loan may be prepaid, but it must be prepaid in full and there is a declining prepayment penalty during the first half of the term.

     Santa Clara, Ca 95051

     inquiries@novacommercialcapital.com