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504 Loan Program Q & A

Question
What is the 504 Loan Program?

Answer
The 504 Loan Program is a fixed asset financing program for expanding small businesses. It is the first federal financing tool to recognize the importance of small businesses in the job creation process through their physical plant expansions. The "504" is the Economic Development Program of the U.S. Small Business Administration (SBA).

Question
What does the 504 Loan Program do?

Answer
Small businesses, inherently unable to tap into the long-term capital market, can do so with the 504 loan. Terms and conditions more suited to the needs of small business are possible. The structure of 504 loan financing supplements private sector financing from conventional lending sources.

Question
What are the programs distinguishing features?

Answer
a) Typically 50% of a project's financing comes from a private financial institution. The is a conventional (non-SBA guaranteed) bank loan secured by a first lien so that each 504 loan leverages a minimum of 50% private capital.

b) A maximum of 40% comes from a Certified Development Company, such as Evergreen, as the "504" loan. The 504 loan carries a fixed, below market interest rate, with a term of 20 years for real estate and 10 years for equipment. It is typically secured by a second lien. The minimum recommended 504 loan is $200,000. The maximum is $1,500,000 for regular projects, $2,000,000 for public policy projects and $4,000,000 for small manufacturers.

c) A minimum of 10% comes from equity. Conventional financing normally requires a small business to provide at least 20% equity. The 504 structure frees up additional cash for productive working capital purposes.

d) Most importantly, every project financed with 504 financing results in the retention or creatino of one full time permanent private job for each $50,000 of 504 funding in the project, or has an alternative explicit economic impact on the local economy.

Question
What are Certified Development Companies?

Answer
Certified Development Companies like Evergreen are local public/private partnerships organized as non-profit community based corporations that provide 504 financing to local small companies. They are "Certified" by the Small Business Administration to offer 504 loans to eligible small businesses. SBA guarantees the development companies' 504 loans. This loan program has the lowest default and loss rate of any of SBA's financing programs.

Certified Development Companies are staffed with professionals who work directly with small businesses. These professionals market, package, process, close and service 504 loans and many CDCs offer and implement other economic development programs in their areas of operation. There are over 300 Certified Development Companies nationwide.

Question
SBA guidelines require that "new" business provide at least 15% of the eligible project costs. The basic definition of a new business is that it has been in operation for less than two years. Does the business meet the two-year requirement at the time of loan application, loan approval or when the loan is closed?

Answer
The SBA will consider the length of business operation at the time the loan is APPROVED by SBA.

Question
If a borrower with an existing SBA 504 loan in an urban area wants another loan for a new building in a rural area, what is the borrower's total loan limit, $1,500,000 or $2,000,000?

Answer
If the second loan were to be in a rural area the total limit to the borrower would be $2,000,000. If, on the other hand, the first loan was in a rural area and the second were to be in an urban area, the total borrower limit would be $1,500,000.

Question
In areas identified as being rural for the purpose of 504 lending, does the job creation requirement apply for a business seeking 504 financing?

Answer
The job creation requirement of one new job created for each $50,000 loaned by the CDC does not apply to projects located in a rural area.

Question
In the event of a cost overrun incurred on a project during its construction phase, how may the additional costs be addressed for permanent financing?

Answer
Since the structure of 504 financing is based on a percentage split of the project costs, the qualifying cost overruns would be split between the third party lender and Evergreen based on the original percentage split. Once approval has been obtained from Evergreen, a letter requesting an increase in the debenture amount is sent to the appropriate SBA District Office for concurrence and approval. In the event of cost overruns, additional collateral may be required by Evergreen in order to maintain its loan to value requirements.