FAQ on the SBA 504 Program
What is the purpose of the 504 Loan Program?
The SBA 504 program provides economic development financing that is designed to encourage private sector investment in fixed assets; the results of which increase productivity and create new jobs. The local tax base is also improved by way of adding capital improvements on which taxes are based. The SBA 504 program provides long-term, low down payment, reasonably priced, fixed-rate financing to healthy and expanding businesses.
How can I use the 504 Loan Program?
A 504 loan provides long-term, fixed rate financing for use in acquiring land; construction a new building or renovating an existing one and/or purchasing heavy equipment and machinery.
Is My Business Eligible for a 504 Loan?
Businesses with a net worth of no more than $7.5 million and average income, after taxes, of no more than $2.5 million for the last two years are eligible for financing under the SBA 504 program.
Applicants must also:
- Be an operating business;
- Be organized as a "for profit" organization;
- Be located in the United States; and,
- Be able to demonstrate a need for the desired credit.
How Much $$$$ Can I Borrow?
A small business may borrow up to $4.0 million depending on the particular situation and circumstances of the applicant.
How does a 504 Loan Work?
A borrower typically contributes at least 10% of a project's cost in cash or equity. Colorado Lending Source or a local certified development company can provide up to 40% of the project's cost (and takes a second mortgage on the property), and, a private lender / bank provides the balance of typically 50% in return for a first mortgage on the fixed assets being financed.
What are the interest Rates, Terms and Fees?
Interest rates on the 504 portion of the total financing project are determined by current financial market conditions. The rate is nevertheless FIXED for the term of the loan, which may be either 20 or 10 years. First mortgage lenders charge the going rate on their portion of the financing, which may be fixed or variable. One time fees total approximately 2.74% of and on the 504 portion of the loan plus an attorney closing cost of $1,500, and these are 100% financed within the SBA 504 loan. Other fees are built into the interest rate the borrower pays, just as with a regular bank loan, although all these fees are disclosed up front.
What collateral do I need?
Generally, the assets of the project being financed are used as collateral. Personal guarantees of all 20% plus owners of all businesses involved with the application will also be required.
What is the role of Colorado Lending Source?
Colorado Lending Source's role in accessing funds under the 504 program is through the issuance of a bond or debenture that is guaranteed by SBA. Each month, SBA 504 loans from various communities throughout the United States are pooled and funds are generated through the sale of Federally insured debentures to private investors. A certified development company like Colorado Lending Source processes SBA 504 loan applications through the US Small Business Administration, and also administers and services these loans on SBA's behalf.
