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What Is A 504 SBA Loan?

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What Is A 504 SBA Loan?

Sure, let’s talk about small business — particularly the 504 SBA Loan, granting your business size is classified as a small business. There are several contracting programs by the government which are set aside just for small businesses. 

Size standards differ depending on the industries and are basically based on the number of receipts the company has and also the number of personnel on their payroll. 

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Table of Contents

So, what exactly is the 504 Loan Program? 

The SBA 504 Loan Program is a financial development program provided to small businesses. This is like another way of financing business, making new jobs, and scaling your business. The SBA 504 Loan has been proven and tested in helping small businesses as well as the lenders and the community in general. 

The SBA 504 Loan offers small businesses with financing that are long-term and with fixed rates. They help these small firms either to increase in size or for improvement or modernization such as obtaining new equipment or fixed assets.  

How are the 504 loans made available? 

You can get 504 Loans through CDCs (Certified Development Companies) and community partners that offer the 504 loans within the community. Let’s take a quick glance at what CDC is all about. 

The CDC is basically a non-profit corporation that markets financial development through the 504 loans within the community. They are verified and controlled by the SBA. They also work alongside the joining lenders like banks, to offer these small businesses assistance on financing, which in turn achieve economic development for the community. You may locate your local SBA office to find your respective CDC. 

How are the 504 loans structured? 

The SBA 504 loans are usually built in a way where the SBA provides two-fifths of the overall cost of the project, the borrower covers one-tenth of the project costs, and a participating lender like a bank covering up to one-half of total project expenditure. 

Sometimes, the borrower is asked to cover one-fifth of the costs. So it’s essentially, 50% lender, 10% borrower (in some cases, 20%), and 40% SBA.

How should 504 funding proceeds be utilized? 

The use of the funds from 504 loans must be for the purchase of fixed assets and other costs. This includes acquiring and buying existing buildings and lot and lot improvements. Soft costs are included here like street improvements, landscaping, utilities, and parking lot spaces. 

Renovation and upgrading the facilities as well as building new ones are also allowed. Purchase of other assets like equipment or machines and loan refinancing connected with the scaling of business through the recently developed or renovated facilities. 

However, the SBA 504 Loan Program may not be used for working capital, for repaying or consolidating previous loans, or refinancing — except for those mentioned above. 

What makes a small business eligible for an SBA 504 loan program? 

To get accepted for a 504 loan, your company must qualify under the size standards under the SBA. Non-profit companies are not allowed. Your company must have a net worth of $15 million USD or above and an average net income of $5 million USD or less. If you want to know more about the points of reference for eligibility, get in touch with your local CDC. 

What is the limit of the 504 Loan? 

In terms of project size, there is no maximum amount but the maximum SBA loan amount or the debenture is $5 million USD. However, energy projects are qualified to get a slightly higher debenture at $5.5 million USD.

For every $100,000 USD, the manufacturer is expected and required to retain or create one job. In lieu of retaining or creating a new job, the small business may be eligible if it meets a public policy goal or community development goal such as bringing new income to the community, helping out in manufacturing firms, allowing the stipulation of business growth, among other things. 

For public policy goals, 504 Loans are made available for business expansion owned and controlled by women, veterans, especially those with disabilities, as well as businesses owned by minorities. 

The project assets that are being funded through the 504 loans can serve and be used as collateral. Interest rates correspond with the regular rate for a five-year and ten-year US treasury issue. Also, loan maturities of ten to 20 years are typical. 

What are the benefits of the SBA 504 Loans for Small Firms? 

The SBA 504 loan programs provide both on-the-spot and long-term gains. This allows small business managers to focus more on scaling their businesses. The best benefits you can get from getting an SBA 504 loan is that you are guaranteed zero balloon payments, longer loan amortizations, fixed-rate interests, and a huge chunk of financing —all 90% of it!

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