What You Need to Know About 504 Loan Program
October 9, 2018
October 9, 2018
The 504 loan is a low-interest financing option available from the Small Business Administration (SBA). The 504 SBA loan program aims to help small businesses purchase the assets they need to grow. It is a long-term, fixed-rate finance option for businesses looking to acquire new facilities or purchasing equipment, but it does have some restrictions.
Many small businesses struggle with cash flow issues, and without access to the capital they need, growth can feel impossible. Perhaps you need larger working premises or new equipment to deal with an influx of trade. If this sounds familiar, it might be time to apply for an SBA 504 loan.
A 504 loan is provided by the SBA in conjunction with CDCs and your bank. This can be confusing, so it helps to break it down: 40% of the loan amount is provided by local nonprofits, also known as Certified Development Companies (or CDCs). This amount is completely guaranteed by the SBA and has a maximum limit of $5 million on the SBAâ€™s portion. To be eligible for this funding option, you will need to finance the first 10% of what you wish to borrow. A private sector lender will need to finance the other 50%, usually your bank.
There is also a job creation requirement. This usually amounts to one job per $65,000 of SBA loans funds, or $100,000 for Small Manufacturers with a NAICS code beginning with 31, 32 or 33.
Because the eligible uses for an SBA 504 loan are generally limited to real estate, machinery, and equipment, 504 small business loans are not usually available for startups.
In order to qualify for the 504 program, you must meet the SBA’s definition of a small business. For purposes of an SBA loan, a business qualifies as â€śsmallâ€ť if it is “independently owned and operated and does not dominate in its field.” Your business cannot have a tangible net worth of over $15 million. Your net income should also be less than $5 million after tax for the two preceding years.
You must also plan to use over half of the property (51%) for its own operations within 12 months of ownership. If your building is to be newly constructed, you must use 60% of the funding upfront for this.
Other eligibility requirements include:
You will also need to show a comprehensive business plan and, in some cases, extensive management experience.
What can you use the money for?
You canâ€™t use money from an SBA 504 loan to secure working capital or purchasing inventory.
A good example of an eligible project of an SBA 504 loan is restaurant financing. While the building of the site and the equipment and furnishings would be covered, the inventory and staffing costs would not.
For a full list of eligible uses, or if youâ€™re not sure if your project qualifies, you can visit the SBA website.
If youâ€™re looking into building or renovating a facility or purchasing equipment needed to expand or improve your operations, an SBA 504 may be a good option for financing.
The Small Business Administration (SBA) works in conjunction with your bank and can offer a number of loan options to help you build or grow a business. The SBA 504 program is used to finance fixed assets like commercial real estate and industrial equipment, but it cannot be used for working capital or inventory. If you donâ€™t fit the eligibility criteria, be assured that the SBA offers other loans for small business owners.
The SBA 504 loan has many benefits, but it is not appropriate for all business owners. An upside thatâ€™s most attractive to borrowers is that this particular loan type requires as little as 10% equity down, compared to the 25% or 30% typically required for traditional business financing. This means you can preserve capital for other business needs, which will help your business grow in a shorter space of time.
If you fit the above criteria and meet the SBA’s definition of a small business, there’s no reason why an SBA 504 loan couldnâ€™t help finance your business. However, the application process for this funding can be lengthy and complex, so if you’re unsure youâ€™ll qualify, you should contact the Small Business Administration for further advice.
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