Guidelines for Participating in the SBA 504 Loan Product
You may want to consider these steps before your bank offers the SBA 504 loan product. These steps will help you become as informed as possible about the product, the process and may help mitigate surprises for you and your borrowers.
The Nature of the Beast
Understand the basic structure and parties to a typical 504 loan project. It is different from both a conventional business loan structure and a typical SBA or USDA guaranteed loan project. The 504 loan product was designed as an economic development (job creation) product for established, growing small to medium sized businesses. While start ups are now allowed, be cautious.
Here is a typical 504 loan project, structure and benefits:
The Borrower (injects at least 10% of the financing as equity)
- Low down payment (often just 10%)
- Long term (20 years on SBA portion for Real Estate or 10 years on M&E)
- Attractive fixed rates, and soft costs are rolled into the loan
SBA Intermediary – Six Bridges Capital Corporation (6BCC) (provides up to 40% of the financing through a 504 debenture.)
1st REM/UCC Bank Lender (provides 50% or more of the financing)
- Comfortable loan to value position (often just 50% LTV)
- Can offer customer more flexible credit terms like fully amortizing loans
- Communication is key with both the borrower and 6BCC
- Understand your role and how it fits the overall loan product because the projects can be more complex and can take a bit longer
Typical 504 Structures
|Standard||New Business or Special Purpose||Both New and Special Purpose|
|1st REM/UCC Lender||50%||50%||50%|
Why is 6 Bridges Capital Corporation a Good 504 Partner?
The true trick to a smooth SBA 504 project is using a Certified Development Company that will take the lead and truly knows the ropes as they will be the primary contact with SBA. 6 Bridges Capital Corporation knows the 504 loan product inside out. We understand the process and have established (and positive) relationships with SBA key personnel. 6 Bridges Capital Corporation provides our participating senior lenders with:
- Decades of experience
- Delegated authority from SBA
- Trust – we will act as your partner when relating to your borrower
- Customer focused – we will deliver quality service to you and your borrowers
The key to getting started with offering the SBA 504 loan product is to educate your staff on the product parameters. The most efficient (and easier) way is to take a 101 course on the topic.
- If 504 looks like a fit, schedule a joint call with your 6BCC representative and get the communication started
- Together educate the borrower on the pluses and challenges, if any, of the 504 product and process
- Establish communication protocols and “up front agreements” on staying in touch
- Discuss general loan structure parameters with 6BCC and the applicant to mitigate future surprises, such as terms, pricing etc.
Successfully Obtaining the 504 Takeout With 6 Bridges Capital Corporation
We suppose the “scariest” part of the entire transaction for the 1st REM/UCC lender, is the part in the process where you have to carry up to 90% of the deal until the 6 Bridges Capital Corporation debenture sells and pays down the bank. In essence, the lender serves two roles: that of the interim lender for up to 90% of the deal (short term) and that of the 1st REM/UCC lender on the conventional piece for ½ of the project (long term). Assurance that the takeout of 6BCC’s 40% portion will definitely happen is important to the lender for this type of transaction to make sense. So what are some critical keys?
- Share your loan commitment with 6BCC as soon as possible
- Coordinate communication and agreement on ALL loan terms (both interim loan and both permanent loans) with the borrower
- Fund 2 loans for the interim period (there is always at least a short interim period in a 504 structure, usually there is an extended construction period)
i. Write a draw note for the 6BCC takeout portion
ii. Anticipate the final bank portion of the permanent loan in a 2nd loan
- Always assume a slightly longer period than you originally think to mitigate multiple renewals of the interim loans
- Consider requiring auto debit for payments (6BCC will require it on their loan and it is another way to strengthen your relationship with your client)
- Embrace the Third Party Agreement (SBA Form 2287), understand it’s importance and let it guide your future interaction with 6BCC and your borrower.
“Joint custody” for the life of the loans – coordinate prudent servicing
One of the secrets of a positive experience when participating in a SBA 504 transaction is to consider your relationship with 6 Bridges Capital Corporation as a partnership. It is much more than just a participation agreement in that 6BCC will and should take the lead on making sure the borrower is in compliance with all SBA requirements. Tune in and know what 6 Bridges Capital Corporation (essentially SBA) will expect to protect the integrity of the 504 loan (and your first lien position).
- Your borrower has 2 distinct loans to service, so consider a “joint custody” approach where you coordinate site visits, updated information etc.
- Avoid surprises. If you hear of something you think 6BCC should know, tell them and ask them to do the same
- Take a long term relationship view and it will pay dividends
i. Ask 6BCC for referrals
ii. Offer to sit on 6BCC’s board and/or loan committee
iii. Communicate and collaborate – again, this is a partnership
Workouts and Liquidation
6 Bridges Capital Corporation is experienced in this area because SBA has delegated the responsibility of collecting on defaulted loans to us. This is where the partnership between the 6BCC and the 1st REM/UCC lender can really come into play if handled with care and given the correct amount of importance by BOTH parties.
- Be aware that 504 workouts can be prolonged – longer than usual non-accrual periods
- The wait is usually worth it, rarely do 1st REM/UCC lenders lose principal
- Be willing to assist 6BCC and the SBA in a workout:
i. Can the bank extend new, safe credit (perhaps a line of credit) to bridge a short term, definable need?
ii. Does the bank have relationships with Auctioneers and other savvy fixed asset vendors that can help bring expertise to the project
iii. Think about other ways and means to constructively help your borrower and 6BCC/SBA get through a difficult time with you
- Educate yourself on what the process is for effectively liquidating a 504 transaction (again, SBA processes come into play) and how you can partner with the CDC to make It easier (and more profitable). See the CDC 504 liquidation plan template for a look into the “mind of SBA.”
Truly understand the SBA 504 loan product you are offering to your borrower (why are you offering it, how does it compare to your other loan products, and what is your strategy in offering it successfully?) Pick 6 Bridges Capital Corporation as your partner (you will never regret it) who will take the lead with SBA requirements. Communicate and work together because this structure can be more complex than normal. Take the long view as these loans usually stick to the books nicely for the long haul so you will want to take advantage of that feature.