SBA 504 loan

If your business needs to get a new space, buy equipment, machinery, or any other major fixed asset, modernize your building, or expand in order to keep up with demand, an SBA 504 loan may be what you need. This is a loan program set up by the SBA to help small businesses get the funding they need in order to acquire major fixed assets, to expand, or to modernize.

The SBA 504 loan program provides long-term, fixed-rate financing. The goal of the program is to encourage small businesses to grow and create jobs, and to encourage lenders to help finance this community growth and job creation.

Like all SBA loans, the SBA has provided very specific requirements for how the loan can be structured, and what they will guarantee. For the SBA 504 loan programs, the loans have to be comprised of three parts. The first is a senior lien or first mortgage that is provided by a private sector lender for up to 50% of the project cost. The second part is that the borrower must contribute at least 10% of the project cost in personal (business) equity. In other words, they have to invest in themselves. Then third part is the SBA guaranteed loan for up to 40% of the cost, which will act as a junior lien or secondary mortgage for the project.

For the SBA 504 loans, 100% of the loan (40% of the total project cost) is backed by or guaranteed by SBA.However, the funds can only be used for major fixed assets, these are defined by the SBA to be items such as:
1. Real estate. It can be either existing buildings or land.
2. Upgrades. The SBA specifies that this can include things like grading a street, or paving and landscaping a parking area.
3. Remodel, modernization, update, or conversion of existing facility.
4. To purchase machinery.
5. To purchase equipment. This needs to be long-term equipment.

According to the SBA 504 loan structure, borrowers can finance up to 90% of appraised property value, or 100% outstanding principal. The percentage amount depends on which is lower. Of course, in addition to this amount, the loan can include eligible refinancing costs.

So, how can you know if you qualify for or are eligible for SBA 504 loan programs? Here are the eligibility requirements set by the SBA.
1. The small business must operate for profit.
2. The small business must in fact be a "small" business as defined by SBA size standards.
3. Net worth under $7.5 million for tangible assets.
4. Net income under $2.5 million after taxes (for past two years).
5. Loans are not made to businesses speculation in investing in rental real estate.

If you meet the eligibility requirements, you then need to find an SBA partner lender, fill out the application, and submit it for approval.