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What is the SBA 504 Loan Program?
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The SBA 504 Loan Program promotes local economic development by providing long-term fixed-asset financing to expanding small businesses. More specifically, the SBA 504 Loan is designed to assist small businesses that will be financing the acquisition of owner-occupied facilities and that will create or retain valuable jobs within the community.
The 504 Loan was created by the U.S. Small Business Administration's development company program, which is authorized by Title V of the Small Business Investment Act; Title V is the section from which the program's common name of "504 Loan" is derived. The SBA 504 Loan Program has the lowest default and loss rate of any of SBA's financing programs.
An eligible borrower obtains a 504 Loan by providing application information to a Certified Development Company.
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What is a Certified Development Company? |
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A Certified Development Company (CDC) is certified by the U.S. Small Business Administration to provide 504 Loans to eligible small businesses. CDCs are staffed with professionals who work directly with the small business owner throughout the entire loan process, including packaging, closing, and servicing of the SBA 504 Loan. CDCs collaborate with the borrower and the private-sector lending institution involved in the project to tailor a financing package that meets program requirements and the credit capacity of the small business.
Each CDC has its own Board of Directors, members of which work in local government, private-sector lending institutions, and business and community organizations. The CDC Board of Directors approves the loan applications submitted for review by the CDC. There are over 300 Certified Development Companies nationwide; each CDC is authorized by SBA to operate within a specified Area of Operation.
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What is TCM CDC's Area of Operation? |
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TCM operates in the entire state of Minnesota and portions of Western Wisconsin. |
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What are the eligibility requirements of the SBA 504 Loan? |
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The SBA 504 Loan Program requires that the small business applicant is a for-profit entity that has a net worth of less than $8.5 million and a net-profit-after-tax averaging less than $3.0 million for the previous two years. In addition, owners of the business must be within SBA's personal liquidity guidelines.
The SBA 504 Loan Program also requires that the small business applicant has a private-sector lender commitment (typically for 50 percent of the total project cost) and is able to contribute the minimum equity injection (at least 10 percent of the total project cost.)
In addition, the SBA 504 Loan Program requires that the small business applicant meet job creation and/or job retention goals, as determined by the SBA 504 Loan amount, or meets an economic development objective (Woman-Owned Business, Minority-Owned Business, Rural Development, etc.)
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What are the eligible project costs that can be financed with the SBA 504 Loan? |
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Eligible project costs include the following:
- Land and/or Building Acquisition
- Building Construction or Renovation
- Purchase of Machinery and Equipment that has a useful life of greater than 10 years
- Professional Fees, Soft Costs, and Contingencies directly related to the project
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What loan amounts are available with the SBA 504 Loan Program? |
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The maximum SBA 504 Loan is $1.5 million, or $2 million if the project meets at least one of SBA's economic development objectives (Woman-Owned Business, Minority-Owned Business, Rural Development, etc.) Manufacturers qualify for $4 million. There is no maximum total project cost. The SBA portion cannot exceed 40 percent of the eligible project costs. |
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What amount of equity is required from the borrower for the SBA 504 Loan Program? |
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The minimum equity injection is at least 10 percent of the total project cost. In addition, if the project involves the purchase or construction of a single-purpose facility, the required equity injection increases by 5 percent. If the business is new (less than two years old), the required equity injection also increases by an additional 5 percent. Start-up businesses need to be sufficiently capitalized. |
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What are the terms of the SBA 504 Loan? |
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SBA 504 Loans used for the acquisition of real estate typically have a term of 20 years, while machinery and equipment loans typically have a term of 10 years. The SBA 504 Loan has a low interest rate, which is fixed for the entire term of the Loan. The interest rate is based on a spread over the current market rate for 10-year U.S. Treasury issues and is determined when the loan funds. |
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What collateral is taken to secure the SBA 504 Loan? |
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Collateral taken to secure the SBA 504 Loan typically includes: a second mortgage on the land and building that is financed; a second lien on any machinery, equipment and/or fixtures that are financed; unsecured personal guaranties from any principal with greater than 20 percent ownership; and lease assignments. |
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What are the insurance requirements for the SBA 504 Loan? |
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A collateral assignment of life insurance is typically obtained on the small business owner(s). Title insurance and hazard insurance are both required on the project property. If the project property is located in a flood hazard area, flood insurance is also required. |
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What are the occupancy requirements associated with the SBA 504 Loan? |
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The small business applicant must become the primary occupant of the property financed. Please see Loan Requirements for details. |
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What fees are associated with the SBA 504 Loan and TCM CDC? |
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There are no up-front fees or deposits required by TCM CDC. There are fees associated with the SBA 504 Loan that are required by SBA for every 504 Loan that is funded; these fees are approximately three percent of the SBA 504 Loan and are financed as a part of the Loan. In addition, there are servicing fees associated with the Loan that are reflected in the effective interest rate. Finally, there are out-of-pocket expenses related to the SBA 504 Loan closing (which occurs separately from the bank closing), including but not limited to recording costs, filing fees, title insurance premiums, hazard insurance premiums, and flood insurance premiums (if applicable). Please see Loan Fees for a detailed description of these fees. |
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Is there a prepayment penalty associated with the SBA 504 Loan? |
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There is a declining prepayment penalty that is applied to the SBA 504 Loan for the first half of the loan term. Please see Loan Fees for details regarding how this fee is calculated. |
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How do I apply for the SBA 504 Loan? |
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Contact TCM or your current financial institution and inquire about SBA 504 Financing. |
