SBA 504 Loan Structuring
The structure of the 504 Loan Program makes it unique among all of the debt financing options available to small business borrowers. Three parties (there can be more) are usually involved:
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A private sector participant (usually a bank) will typically provide 50% of the required financing for an eligible project:
Although usually a bank, this private sector participant could also be an insurance company or other non-bank lender. In return for their share (50%) of the financing, this private sector lender will usually take the first collateral position (a First Mortgage) on the assets being financed. This lender will charge going market rates for its share of the project and their loan must have at least a ten year term when the 504 share is 20 years, or at least a seven year term if the 504 share is 10 years.
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A certified development company (like Colorado Lending Source) will typically provide up to a maximum of 40% of the required financing on an eligible project -- this is the 504 Loan Program share:
The certified development company (CDC) actually raises the money for its share of the project costs through the sale of a semiannual coupon bond on the New York market. This bond is 100% guaranteed by the U.S. Small Business Administration, which makes it an attractive instrument to potential buyers in the securities market. In return for this share of the project financing, a CDC like Colorado Lending Source takes a second collateral position (= second mortgage) on the project assets at an interest rate that is fixed for the life of the loan (usually 20 years) and set by the market in the month that the instrument is actually sold.
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The business itself will have a minimum of 10% of the required financing at risk or invested in the project:
This is usually provided by the business borrower in the form of cash or land, with or without improvements (and valued at either cost or market price, depending on whether or not the land has been held for more than two years).
