SBA 504 Loan Program Fact Sheet

About the Business Finance Corporation

The Business Finance Corporation (BFC) was certified under the Small Business Administration’s (SBA) Certified Development Company program in September 1982. The BFC acts as an agent to analyze, package and submit loan requests under the SBA 504 program. The BFC also acts as the servicing agent for the approved loans. The purpose of the BFC is to stimulate the growth and expansion of business in Michigan.

The SBA 504 Loan Program

The SBA 504 loan program provides viable small and medium size businesses with long-term fixed rate financing for the acquisition or construction of fixed assets. Projects are typically financed 50% private lender, 40% SBA and 10% by the small business. Because the SBA takes a secondary collateral position on project assets the private lender can reduce the amount of equity normally required of the borrower.

Traditional Combinations 50% Bank 40% SBA 10% Business

Special Purpose OR Start-Up 50% Bank 35% SBA 15% Business

Special Purpose AND Start-Up 50% Bank 30% SBA 20% Business

The SBA 504 program is a “take out” financing program. The SBA offers an up-front authorization to finance its portion of the project. The participating bank provides interim financing, advancing project funds during the construction or acquisition period. After the project is completed, the SBA reimburses or “takes out” the bank by the amount of the SBA’s loan commitment. SBA loans are funded by the sale of federally guaranteed debentures on the open market.

Project Size

Projects range between $250,000 and $13,000,000+. The maximum dollar amount the SBA can contribute to a single project is $5,000,000 ($5,500,000 for manufacturers and “green” projects). The SBA cannot exceed 40% of the total project costs.

Eligible Businesses

For profit businesses engaged in manufacturing, retail/wholesale, service and construction that meet the following small business size standards (including affiliates):

• Tangible net worth less than $20 million
• Average annual net profit after tax for the previous two years of less than $6.5 million

Ineligible Businesses

The SBA has identified certain ineligible businesses including, but not limited to:

non-profits lending institutions private clubs

gambling facilities life insurance companies religious institutions

Eligible Passive Company

The SBA 504 funds can be lent to a passive company formed for the purpose of holding real estate or equipment for lease to an operating entity that is an eligible small business. Both the passive company and the operating company must meet small business size standards. The operating company must be a co-borrower or guarantor of the SBA loan.

Eligible Project Costs

• Land and building improvements
• Building construction, acquisition, expansion or renovation
• Equipment acquisition (new and used). Must have an economic life of at least 10 years
• Professional fees-survey, engineering, legal, architect, accounting, appraisal, environmental
• Interest, fees and points on the interim bank loan
• Refinancing of qualified fixed assets

<sub>Note: On the acquisition of an existing building the small business must occupy at least 51% of the space. The funds can be used to acquire the building, renovate the exterior, repair or install electricity, plumbing, heating and cooling for the entire building and renovate any space to be occupied by the small business.

On the construction of a building, the small business must initially occupy 60% of the space, and must occupy 80% of the space within 10 years. The SBA will take a collateral assignment on all leases.

In either lease situation, the small business must show the ability to pay the project debt (both the bank and SBA loans) without the third party lease income.</sub>

Ineligible Project Costs

• Working capital
• Autos, trucks or airplanes
• Counseling, finders franchise fees
• Bank fees for end loan

SBA Loan Terms

• 10, 20 or 25 years dependent open asset to be financed

SBA Loan Interest Rate

• Fixed for the full term of the loan
• Determined at bond sale after the project is complete
• The quoted effective rate includes the note rate paid to the bondholder and a combined on-going servicing and borrower guarantee fee of approximately 1.6%

Prepayment

• Declining prepayment penalty for the first half of the term of the loan
• Allowed to prepay with 45 days written notice
• Debentures are assumable

Collateral

• SBA 504 loans are secured by a lien on the fixed assets acquired with the loan proceeds. SBA’s lien is subordinate to the private lender’s position.
• SBA requires personal guarantee(s) of any person owning 20% or more of the applicant passive and operating companies.
• SBA may require additional collateral based on the type of business, debt coverage and type of assets being financed.
• Life insurance as collateral may be required on principal(s).

Jobs Test

• One job must be created or retained for every $90,000 the SBA lends.
• Or, the business must meet community or public policy goal.
• Or, the business must meet the National Objectives Test.
• For small manufacturers this requirement is one job created or retained for every $140,000 the SBA levels.

Credit Criteria

The 504 loan program is designed to assist healthy, expanding businesses. The following credit criteria apply to such businesses:

• Existing or projected cash flow from business operations is greater than debt service needed to pay both existing debt and debt resulting from the proposed loan.
• Sufficient collateral to secure the loan.
• Sufficient working capital to sustain the projected growth of the company.

Private Lender

Amount: The private lender’s end mortgage or loan must be as much, or more than, the SBA’s amount. Projects involving special purpose buildings or startups require a minimum of 50% bank financing. The private lender also provides interim lending.
Maturity: At least 7 years, when SBA loan is a 10 year term. At least 10 years, when SBA loan is a 20 or 25 year term.
Prepayment: Not regulated.
Interest Rate: Must be reasonable.

Small Business Injection

The small business must inject at least 10% of the project cost in the form of cash, land equity, or land and building equity (must be part of project).

Fees

There are four types of fees associated with the SBA 504 loan program:

• A one time up-front participation fee equal to 1/2 of 1% of the amount of the bank’s mortgage on the project. This fee is paid by the primary lender just prior to closing.
• A one-time processing fee equal to approximately 2.15% of the SBA portion of the loan. This fee is
  built into the SBA loan amount and is financed over the term of the loan.
• An ongoing servicing fee of approximately 1.6% of the declining loan balance. This fee is included
  in the effective interest rate and is paid as part of the monthly payment.
• Legal fees and expenses incurred by the BFC in closing the loan are $3,000. This fee is paid by the borrower prior to closing.

Processing Time

30-60 days from the date of application

For more information, contact:

Business Finance Corporation
Oakland County Executive Office Building 41W
2100 Pontiac Lake Road | Waterford Township, MI 48328
(248) 858-0765