SAVE MONEY AND GROW YOUR BUSINESS WITH AN SBA 504 LOAN
Save Money and Grow Your Business with an SBA 504 Loan SBA's 504 program is designed for the purchase of fixed assets such as buildings or land, and is a fixed rate, long-term form of financing. The main purpose of this program is to help further the economic development of a community. The SBA works with Certified Development Companies (CDCs) and lenders from the private sector to help finance small businesses. Funding from the 504 loan program can be used to acquire new facilities, purchase land or refurbish existing buildings. Businesses can also use the funds to buy long-term equipment or machinery, make street improvements such as grading, and install utilities, parking lots, or landscaping. 504 Loan Benefits The SBA 504 Loan program is a powerful economic development loan program that offers small businesses another avenue for business financing, while promoting business growth. The 504 program benefits the economy and local communities as well; having provided over fifty billion in loans, the program has helped to create more than two million jobs. The CDC, backed by SBA's guarantee, will loan up to forty percent of the cost of a project, and the private sector lender will cover fifty percent, for a ninety percent loan to value ratio. The 504 Loan program offers both immediate and long-term benefits, including: •
Ninety percent financing, since most closing and "soft costs" can be financed
Twenty-year second mortgage at below market interest rates
Multiple options for title and ownership
Improved cash flow for small businesses
Flexibility with tax benefits
Longer loan amortizations
No balloon payments
Fixed interest rates
Potential Drawbacks The loan cannot be used to pay off or consolidate existing debts, nor can it be used for working capital, purchasing inventory or refinancing debt. To be eligible for a 504 Loan, your business must be a “for profit” organization that falls within size standards established by the SBA. Your business must have a tangible net worth not more than fifteen million, and an average net income of five million or less after federal income taxes for the preceding two years prior to applying for the loan. Important Facts about the 504 Loan Program The 504 Loan Program provides small businesses with long-term, fixed-rate financing used to obtain fixed assets for growth or renovation. 504 loans are made available through Certified Development Companies (CDCs), SBA's community based partners for providing 504 Loans. 504 Loans are normally structured with SBA providing forty percent of the total project costs, a participating lender covering up to fifty percent of the total project costs, and the borrower contributing ten percent of the project costs. Under certain circumstances, a borrower may be required to supply up to twenty percent of the total project costs. Maximum projects costs are in the range of (but not limited to) twelve million. A CDC is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.
There are over 260 CDCs nationwide each having a defined Area of Operations covering a specific geographic area. The area of operation for most CDCs is the state in which they are incorporated. To contact a CDC in your area, first use this link to locate your local SBA district office.
Loans cannot be made to businesses engaged in nonprofit, passive or speculative activities. For additional information on eligibility criteria and loan application requirements, small business and lenders are encouraged to contact a Certified Development Company in their area. 7 Questions to Ask when Comparing Lenders A helpful strategy when evaluating business service providers is to check references thoroughly. Try to obtain at least three references from each lending company youâ€™re considering. If possible, these should be companies similar to yours in size as well as industry. Contact each reference and ask questions such as: 1. Did the lending agent take time to answer your questions and learn about your
business? 2. Were you given adequate assistance through the application process? 3. Did you get the right type of equipment lease agreement for your needs? 4. Did the company work with you through any challenges in making payments? 5. Do you feel you can depend on this lending company as a trusted partner? 6. Do you feel that you were always treated with fairness? 7. Would you use this lending company in the future?
10 Mistakes to Avoid When Applying for a Business Loan 1. Not being prepared with a business plan. Even when not applying for a loan, it's wise to have a business plan to help keep your business running smoothly. But a good business plan is a basic essential for the loan application process. Lenders will want to know how you plan to operate your business, and that you are capable of reaching the financial goals you have projected for the business. Include all financial data at your disposal to support your plan. 2. Not shopping around before choosing a lender. Investigate the loan programs offered through credit unions and other sources in addition to your local bank. Small business owners can find excellent resources through the Small Business Administration.
3. Not having the required financial documentation. Whether applying for a business or personal loan, take the time to get your finances in order so you can present the proper documentation to the lender. 4. Not being aware of your credit rating. Obtain your credit history and scores from the three main credit reporting agencies so you have an idea of the type of loan you can qualify for. If your credit report has errors it may be worth the effort to clear them up before proceeding with your loan application. 5. Not indicating what the loan will be used for. Lenders will want details regarding how the money will be used. They also want assurance that you know exactly what your business needs are and how the loan will help meet those needs. 6. Signing the loan agreement without carefully studying the terms. Once you find out you've been approved, it can be tempting to sign without reading the agreement. But take the time to go over the details carefully and ask for clarification of any points you don't understand completely. 7. Not locking in a good rate. When you do find a good rate, don't hesitate to lock it in before it has a chance to go up. Waiting for interest rates to drop further could prove costly. 8. Making changes in your business. Lenders look for stability in business operations, so significant changes in personnel, or in the way you run your business may be cause for concern. 9. Lack of equity in the project. Seeing that you have personally invested in your business project will give lenders more confidence in taking on the risk; you will be more likely to work hard for success when your personal assets are also involved. 10. No collateral to offer. Few lenders will approve a completely unsecured business loan.
3 Key Qualities to Look for In a Provider Take the following factors into consideration when looking for the right commercial lender a 504 Loan: â€˘
Rate: Be sure that you understand not only what the current rate amount is, but also what kind of future rate you will be getting so that you can anticipate costs down the road.
Reputation: The reputation of the commercial lender is very important. Look for a lender that has a track record of credibility will work with you in a favorable way if there comes a time when you have difficulty making payments. Search the Better Business Bureau records and Google for information about a particular company and any complaints that may have been filed against that company.
Loan Amount: Depending on the credit history of the business and the key players, the amount of the loan that you will be able to get may vary by mortgage lender. Therefore, you will want to preauthorize the loan prior to looking for property or equipment to purchase.
Making Your Final Selection There are hundreds of commercial mortgage lenders across the country. Finding the right commercial mortgage lender for your business needs is a time consuming process. It involves doing plenty of research into rates, fees, and the reputation of each lender. The experts at InsideUp have a proven track record for matching businesses with the right vendors for their needs. We have pre-screened, top commercial loan vendors who are willing to compete for your business with highly competitive quotes. We provide this service at no cost or obligation to you. Hundreds of businesses have successfully used our service to find quality service providers who offer significant pricing advantages.
Glossary of Key Terms A/P Accounts Payable A/R Accounts Receivable ACH Automated Clearing House Agency Guaranty A commercial loan written with a guaranty of a private or municipal agency guarantying the loan payment to the lending institution, like the Small Business Administration (SBA) Appraised Value The value placed on an item, product or business by an appraiser recognized for expertise in a particular field Asset The entire property of a person, association, corporation or estate applicable or subject to the payment of debts C Corporation A separate legal entity once it is formed, so it must file its own taxes and be responsible for its dealings. It can have unlimited numbers of shareholders, and those shareholders can be any kind of legal entity. Additionally, since corporations are taxed on their income and shareholders have to claim dividends as taxable income themselves, shareholders of a "C" corporation are double taxed on their dividend income. CFFO Cash Flow from Operations CPA Certified Public Accountant CRA Community Reinvestment Act
Cash Flow The movement of money into and out of your business Cash Flow Statement An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment on financing are paid Certified Development Company A non-profit corporation set up to contribute to the economic development of its community Collateral Something of value â€“ securities, evidence of deposit or other property â€“ pledged to support the repayment of an obligation Commercial Mortgage A mortgage loan written for a business purpose with a building used as collateral Commercial Paper Unsecured promissory notes of large corporations Credit Time allowed for the payment of goods or services sold on trust as well as confidence in the buyer's ability and intention to fulfill their financial obligations Creditor The lender of the funds, to whom someone owes a loan DDA Demand Deposit Account ECOA Equal Credit Opportunity Act Equity An accounting term used to describe the net investment of owners or stockholders in a business. Under the accounting equation, equity also represents the result of assets less liabilities. General Accepted Accounting Principles
General Partnerships A form of business entity in which two or more co-owners engage in business-for-profit. For the most part, the partners own the business assets together and are personally liable for business debts. IRA Individual Retirement Account IRS Internal Revenue Service ISO Independent Servicing Organization Joint Venture Is a general partnership typically formed to undertake a particular business transaction or project rather than one intended to continue indefinitely. Most often, joint ventures are used in real estate matters where two or more persons undertake to develop a specific piece of real property. Liabilities Debt owed by the company, such as bank loans or accounts payable Limited Liability Company (LLC) A distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation (earnings are taxed only once) Limited Partnership One or more "general" partners run the business while "limited" partners contribute capital and share in the profits. General partners remain personally liable for partnership debts and risks while limited partners incur no liability with respect to partnership obligations beyond their capital. Line of Credit A revolving credit where the funds can be re-used after repayment, usually for short durations
Marketable Securities Stocks or bonds sold on an open market, like the New York Stock Exchange (NYSE), for which there is a readily available sale Maturity The date on which a loan becomes due Net Worth Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth) Non-Profit A corporation that cannot issue shares and cannot pay dividends. In addition, under the Federal Tax Code Section 501 (c)(3), a non-profit corporation is eligible for certain federal and state tax exemptions and, upon dissolution, must distribute its remaining assets to another non-profit group. S Corporation Much like a "C" corporation in that it is also its own legal entity, protects its shareholders from legal liability, and requires a certain amount of yearly maintenance. However, an "S" corporation allows shareholders to claim their share of the corporation's income directly on their personal tax return, avoiding a double tax situation. However, an "S" corporation is generally limited in the amount of shareholders. SCORE (Service Corps of Retired Executives) 10,500-member volunteer association sponsored by the Small Business Administration (SBA). SCORE matches volunteer business-management counselors with present prospective small business owners in need of expert advice. Small Business Administration (SBA) A governmental agency that aids, counsels, assists, and protects the interests of small business concerns, and advocates on their behalf within the government Sole Proprietor A sole proprietor is not a separate entity itself. A sole proprietor directly owns the business and is directly responsible for its debts.
Term Loan A loan written for a specific term, e.g., 60 months, calling for a monthly principal and interest payments Time Loan A loan written for a set time period, usually with all principal and interest due at maturity