At some point, it's probably inevitable that your small business will need financing in order to grow. One option is to investigate the Small Business Administration (SBA) programs, including the 504 Loan Program. Whether you need startup funding or capital to run and grow your already established business, this program might be just what you need.
Why Can't I Just Go to My Bank for a Loan?
If you are a small business, it will likely be difficult for you to obtain a bank loan. Banks have strict criteria that you may be unable to meet. And, loans from alternative lenders tend to come with high rates and fees. The SBA, however, focuses on helping America's small businesses. The SBA’s overarching purpose is to encourage economic development and job growth throughout the US economy.
How Is an SBA 504 Loan Different?
A 504 loan encourages conventional lenders to lend money to small businesses by guaranteeing a portion of the loan amount. This is called a debenture and is offered through SBA partners referred to as Certified Development Companies (CDCs).
What Is a Certified Development Company?
A CDC is a nonprofit corporation that's certified and regulated by the SBA. It works with various lenders to make 504 loans available under the framework provided by the SBA. There are over 200 CDCs nationwide, each servicing a specific territory.
What Is an SBA 504 Loan?
The funding of a 504 loan is serviced by two parties. This means that, in essence, an approved borrower will receive two separate loans: one from a traditional type of lender and one from a CDC supported by the SBA. Here's how the financing breaks down:
CDCs are only allowed to contribute up to $5 million in funding ($5.5 million for businesses qualifying for certain energy projects). However, there are no binding restrictions on lenders – they are able to provide two to three times that amount. (Note that this will throw off the above-referenced percentages.)
What Can a 504 Loan Be Used For?
Funding obtained through the SBA 504 Loan Program must be used to expand or modernize a business. Here are some examples of qualifying uses:
504 refinancing loans are also available but come with restrictions. To qualify a business must have been in operation for a minimum of two years, and the underlying debt must be a commercial loan meeting the following requirements:
SBA 504 loans can't be used for inventory or working capital.
Am I Eligible for an SBA 504 Loan?
The following CDC requirements are generally needed to obtain a 504 loan. (Note that the lender working with the CDC may have additional criteria pertaining to the prospective borrower’s credit score and annual revenue.)
What Are the Terms of an SBA 504 Loan?
SBA 504 loans come with longer-term lengths, allowing the borrower to spread out and make lower payments, making them a good option for more extensive and therefore more expensive projects. Depending on what the funding is used for, the repayment length will differ with respect to the loan's lender and CDC portions.
What Kind of Interest Rate Comes With an SBA Loan?
As with repayment lengths, interest rates and fees will vary between the two parts of the loan, although the SBA mandates that lenders can't charge more than 6% above the prime rate (or the maximum interest rate allowed by the state).
The CDC loan portion comes with a fixed interest rate and a fully amortized structure to provide consistency to the borrower's financial commitment. Interest rates for 504 loans are tied to US Treasury rates and are avail for ten-, twenty-, and twenty-five year terms.
Need Business Advice?
It can be complicated to figure out the best way to get financing to grow your small business. Holmes Business Law cannot supply you with a loan but will be happy to help you with any business issue you may have.
So, if you need advice to keep your business running successfully, don't hesitate to give us a call at 215-482-0285.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.
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