An SBA 504 loan, also known as an SBA CDC/504 loan, is a business loan that is guaranteed by the United States Small Business Administration. The Small Business Administration offers long-term financing for real estate, equipment, and other fixed assets. In contrast to other forms of SBA 504 loan requirements, 504 loan involves three parties: the borrower, the bank, and the SBA-approved certified development company (CDC).
Even though the structure of this form of SBA loan is more complicated and the funds can only be utilized for particular reasons, it’s a very cost-effective financing option for firms wishing to buy or upgrade real estate, equipment, or machinery. As a result, SBA 504 loans are frequently confused with SBA commercial real estate loans.
We’ll go over all you need to know about SBA 504 loans in this article, including LOAN REQUIREMENTS, Interest Rates for Startups & Rental Property.
SBA 504 Loans,Overview
Before we get into the details, have a look at the information below to get a better understanding of SBA 504 loans.
- Purchase of substantial fixed assets such as land, buildings, equipment, and machinery is an eligible lending purpose.
- Loan amount: CDC part of loan up to $5 million, up to $5.5 million for specified enterprises
- Interest rates: Fixed, normally about 5% to 6% for the CDC portion; variable for the bank portion.
- Conditions: Up to 25 years
- 10% of the loan amount is usually required as a down payment.
- Collateral: Project assets are frequently utilized as collateral; personal guarantees of 20% or more are sought for business owners.
- Fees: Vary; SBA and CDC costs, as well as bank fees, may apply.
How Does an SBA 504 Loan Work?
Let’s take a closer look at how SBA 504 loans function now that we’ve covered the basics. As previously stated, these loans are structured very differently than other SBA loans. Unlike other loans, which are usually granted by an SBA lending partner, such as a bank, and are partially guaranteed by the SBA, 504 loans are made up of three elements.
- Bank loan (50%): A bank or other direct lender provides half of the total loan amount.
- SBA-approved certified development company (CDC) loan (40%): An SBA-approved certified development company (CDC) extends 40 percent of the total loan amount. CDCs are non-profit organizations that help communities prosper economically. Typically, the bank lender with whom you work can assist you in locating a CDC in your area.
- Down payment (ten percent): The borrower must make a ten percent down payment on this loan. Startups and special-use properties may be required to put down more than 10% on an SBA 504 loan.
SBA 504 Loan Requirements
You must meet certain standards which are the SBA 504 loan requirements to qualify for an SBA 504 loan to purchase commercial real estate in your location. First and foremost, your company must fit the Small Business Administration’s definition of a small business:
- Your company must be regarded as a “for-profit” enterprise.
- A business plan is required.
- You must conduct business in the United States or its territories.
- The role of the entity is crucial. As a result, you’ll need to set up your company as a single proprietorship, corporation, or limited liability corporation (LLC).
- Your company’s tangible net worth must be less than $15 million, and its average net profit (after taxes) must be less than $5 million in the last two years of operation.
Additionally, you must have tried to use other financial resources before applying for the loan.
Within one year of owning the commercial real estate you want to buy, you must plan to use at least 51 per cent of it for your own business.
Eligibility for SBA 504 Loan
You must meet the following eligibility requirements to qualify for a 504 loan:
- You must have a US-based for-profit company
- Your credit score must be at least 680
- business must occupy 51% of your building
- Your business’s net worth must be less than $15 million
- You must be able to pay 10% or more of the project costs for the down payment
- You must be able to show your ability to repay the loan on time from your operating cash flow
SBA 504 Loan Application
So, if you think an SBA 504 loan is ideal for your company, you’ll want to start the application process by finding a lender. Working with a bank or other SBA loan partner, as well as a CDC, will be required.
- Have a tangible net worth of not more than $15 million and an average net income of $5 million
- Meet owner occupancy requirements
- Project must create or retain jobs or promote other public policy goals
The SBA 504 loan program has a large number of national, regional, and community banks as participants. As a result, you might begin by inquiring if the bank you now use for business banking offers SBA 504 loans.
Once you’ve found a bank that can assist you, they should be able to refer you to a CDC that they work with regularly. Alternatively, you might begin by looking for the CDC. A CDC locator tool is available on the SBA website, and the CDC should be able to direct you to a local bank.
After you’ve located a CDC and a bank, you’ll be able to begin the application process. Although the application procedure for an SBA loan is normally lengthy, the 504 loan application is particularly so.
With your SBA loan application, you can expect to be asked for the following documents:
- Business plan
- Personal and business income tax returns
- Business financial statements
- Business debt schedule
- Bank statements
- Collateral
- Personal guarantee
As a result, being as structured as possible throughout the process would be beneficial, as will maintaining a constant contact line with the bank lender and the CDC.
Eligible Uses for SBA 504 Loans
SBA 504 loans are designed for the purchase of major fixed assets which includes:
- Purchasing machines or equipment
- Buying existing structures
- Purchase of property and improvements to the land (e.g. street grading, utilities, parking lots, etc.)
- constructing new facilities
- Existing facilities are being renovated, remodeled, or converted.
- Existing debt associated with a business expansion through new or renovated premises or equipment can be refinanced
SBA 504 Loan for Rental Property
As you begin your search for a small business loan for rental property, there are various sorts of small business loans to consider, each with its own set of SBA 504 LOAN requirements.
Term Business Loan
This category includes a variety of business loans offered by banks and real estate lenders. Some of the loans are designed exclusively for rental purposes, while others are geared toward fix-and-flippers investors. Others bundle a number of investment properties into a single package.
Business Line of Credit
If you need money now for renovations and more in the future, a home equity line of credit (HELOC) could be a good alternative. A HELOC allows you to take out cash up to a certain limit. After you’ve paid it back, you’ll be able to borrow it again.
Alternative Loans
If you don’t qualify for the above choice, you may be relieved to learn that there are other business loan options available.
Alternative loans, such as merchant cash advances, equipment loans, and even small business auto loans, are available, however, they come with higher interest rates than traditional loans.
Why isn’t a loan from the Small Business Administration (SBA) for rental property on this list? The utilization of SBA loans for investment properties is expressly prohibited by the SBA.
Rental Property SBA 504 Loan Requirements and Eligibility
Qualifying for a small company loan for rental property sometimes has more severe standards. You’ll usually be requested for business entity documentation (if your real estate investment company is an LLC or corporation), a voided check, and a scope of work throughout the application process.
Credit Ratings
Your credit score, like any other company (or personal) loan, will play a role in determining your eligibility for a rental property loan as well as the interest rate you pay. The lower the rate you are offered, the higher your score is.
Debt-to-Income Ratio
The debt-to-income (DTI) ratio of you (or your firm) is another key consideration when applying for a rental property loan. This is the ratio of your overall debt to your total income, as you might have predicted. The higher your debt-to-income ratio, the greater the danger you pose to lenders. The majority of people prefer a DTI ratio of 36 percent or less.
Your Initial Deposit
Most lenders will need you to put down a deposit on your home. Some lenders can allow you to borrow with little or no money down (expect those to charge higher interest rates).
Typically, you will be expected to put down 20% of the buying price as a minimum. The more money you put down, however, the cheaper your interest rate will likely be.
When it comes to purchasing your next apartment building investment, business loans for rental property can be beneficial, but they do have some risks. To increase your chances of getting authorized, it’s a good idea to make sure you qualify for financing before you apply.
READ ALSO: SBA 504 loan requirements for hotels
SBA 504 Loan for Startup
To “promote business growth and employment creation,” startups might use an SBA 504 loan to pay big equipment purchases or facility upgrades. Depending on the loan, you can borrow up to $5 million (some projects may qualify for up to $5.5 million) for a duration of 10, 20, or 25 years.
Small-business owners must put up 10% of the loan (up to 20% in some situations), which is a significant barrier for many entrepreneurs to overcome. A Certified Development Company and a bank or credit union jointly fund each SBA 504 loan.
How to get an SBA 504 loan for a startup
Calculate your startup costs:
You can’t get a beginning business loan until you know how much money you’ll need. For at least the first year, including one-time costs like permits, licenses, and equipment purchases, as well as regular costs like payroll, rent, and inventory. This will give you a realistic idea of how much money you’ll need to start your company.
Create a business plan:
A well-written business plan demonstrates to lenders that you’ve considered factors such as your target market, pricing structure, marketing costs, potential obstacles, and industry rivalry. Include a detailed finance request, as well as predicted income, in your startup cost calculation. The idea is to convince lenders that your business will succeed, especially if you don’t have a lot of experience.
Choose a loan and lender:
Determine which SBA startup loan option is best for your company, then find a lender who is willing to participate. To discover a bank, credit union, or community-based lender that participates in your preferred loan program, use the SBA’s Lender Match tool.
Finally, Prepare your loan application and apply.
SBA 504 Loan Down Payment
Most borrowers who apply for an SBA 504 loan will only be asked to put down 10% of the loan amount as a down payment. However, this isn’t the case in every circumstance. Some business owners will have to put down much more money.
For example, if your business is two years old or younger, you’ll need to put down 15% of the loan’s total value to get started. If you own a small business and the property you want to finance qualifies as “special-use,” you’ll have to put down 20% of the loan’s value as a down payment.
The CDC’s contribution diminishes as your donation rises. In no case can the CDC contribute more than 40% of the project’s budget. A special-use property is one that can only be used for the purposes for which it was built.
SBA 504 Loan Interest Rates
The SBA CDC/504 loan interest rate is essentially two loans: one from a bank for 50% or more of the loan amount, and one from a Certified Development Company (CDC) for up to 40% of the loan amount. You will be responsible for paying the remaining 10% as a down payment as a borrower. You may be required to donate as much as 20% in rare situations.
Learn more about SBA loan rate
Conclusion
To be eligible for a 504 Loan, your company must meet the following criteria: Operate In the United States as a for-profit corporation. Have a net worth of less than $15 million in cash for two years before your application, have an average net income of less than $5 million after federal income taxes.
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FAQs on SBA 504 LOAN
Is SBA 504 loan available for rental property
There are loans created exclusively for real estate investors who own rental homes.
What is the interest rate for SBA 504?
The program currently allows for interest rates of 2.231 percent, 2.364 percent, and 2.399 percent for 10, 20, and 25 years, respectively.
Can a new business get a 504 loan?
Fixed assets that “support business growth and job creation” can be purchased with a 504 loan. This could be in the form of a new structure, equipment, or machinery.
Are SBA 504 loans guaranteed?
The US Small Business Administration (SBA) guarantees up to 85% of lender loans. If a borrower defaults on an SBA 504 payment, for example, the SBA will repay the lender 85 percent of the loan. Lenders’ risks are greatly reduced as a result of this guarantee.
