What can a 504 Loan be used for?
In general, only to acquire or improve fixed assets with a useful economic life of ten or more years. Most projects include the acquisition and/or improvement of one or more of the following:
- Land and/or an existing building
- Land and construction of a new building (Buildings on leased land are also eligible)
- Commercial condominiums
- Project related machinery and equipment
- Projected related soft costs
Is my business eligible for SBA 504 financing?
Over 95% of the nation’s companies are classified as “small businesses” by SBA standards. Limitations are set by total revenues and number of employees according to industry. Almost every type of business qualifies for SBA financing: manufacturing, wholesale, service, retail. Loans cannot be made to speculative businesses, media businesses or businesses engaged in gambling activities.
Is there a minimum or maximum Total Project Cost?
There is no statutory limit on the total project cost, though 504 projects larger than about $10,000,000 are uncommon. Many people are surprised to learn that projects may be as small as $250,000.
Does 6 Bridges Capital Corporation provide all of the financing?
No. In every project there will be two loans, one from 6 Bridges Capital Corporation (6BCC) and the other from the participating 1st REM lender. Typically, 6BCC finances 40% secured with a 2ndREM/UCC and the participating lender finances 50% with a 1st REM/UCC (the remaining 10% coming from the borrower).
How much can I borrow?
The total of all loans from 6 Bridges Capital Corporation to a single borrower may not exceed $5,000,000 at any one time ($5,500,000 for a manufacturer). 6BCC’s share of any one project cannot exceed 40% of the actual Total Project Cost. In other words, for projects with a Total Project Cost from $250,000 to about $12,500,000 (or $13,750,000 for manufacturing), 6 Bridges Capital Corporation can finance 40% and the participating lender will finance 50%. For projects larger than $12,500,000, 6BCC’s share is maxed at $5,000,000 (or $5,500,000 for manufacturing), but the participating lender will ‘pick up the difference’ so that 90% financing can be provided.
Is it always 90% financing?
No. There are two conditions which require the borrower to increase the equity contribution by 5% or10% for both (which reduces the 6 Bridges Capital Corporation loan by 5% or 10% for both):
- The real estate is deemed to be ‘single purpose’, e.g., gas station, ice skating rink, car wash
- The business is deemed to be a startup (a business acquisition involving a change of management is also considered a startup)
How does the pricing compare with conventional bank financing?
There is no comparison. To the best of our knowledge, conventional lenders do not offer a twenty year fixed rate loan. Some lenders will fix their rate for 3 – 7 years but if you are interested in a 20 year fixed rate then a 504 loan is a great option. The interest rate that the participating lender will offer is usually very competitive given that the lender has a first mortgage with a 50% loan to cost. Therefore, since their risk is less their pricing can be very competitive.
What is the cost?
There are no out of pocket expenses to obtain a 504 loan. The fees are all rolled into the loan and are included in the effective rate which is quoted to you.
Are there prepayment penalties?
Yes. There is a declining prepayment penalty during the first 10 years. Years 11-20 there are no prepayment penalties. However, during the first 10 years, 6 Bridges Capital Corporation can allow the loan to be assumed if the fixed asset is sold. This is especially helpful if you closed your loan in a low rate environment and sold it when the interest rate was higher.
Are all types of businesses eligible?
Almost all types are eligible. The only types of businesses typically excluded are not-for-profits and businesses whose primary source of revenue is from gambling, lending, or the production or distribution of material considered to be sexually prurient.
Are 504 loans for small business only?
Yes but a small business is probably much larger than you thought. So long as the Net Worth of the business is less than $15,000,000 and the Net Profit After Tax averaged over the last two years is less than $5,000,000, the business is small enough for a 504 loan. Even if a business exceeds these measures, it still might be considered small. For example, a manufacturer that employees 500 or fewer persons is always considered a small business.
Are personal guarantees required?
Yes. Any person who owns or controls 20% or more of the ownership of the business or 20% or more of the real estate (assuming the real estate is held in a separate legal entity) must personally guarantee the 504 loan. In the case of a married couple where both spouses have an ownership interest, the couple is treated as one person, e.g., if both spouses own 10% each, both must guarantee. In certain circumstances, persons with less than a 20% ownership may also be required to personally guarantee.
I have an excellent relationship with my bank. Must I change banks?
Absolutely not. We know the importance of building and maintaining a strong banking relationship. You decide who the participating lender is. (Just about every lender in our service area has participated with 6BCC.)
How long is the approval process?
6 Bridges Capital Corporation prefers working in conjunction with the first mortgage lender to provide an answer at the same time. Typically the approval process is three weeks from the time that all of the information has been provided to 6BCC.
Do I need to get two appraisals and two environmental studies?
No. We work with the banks to let them know our standards prior to the time that the appraisals and environmental studies are ordered. This way the bank and 6 Bridges Capital Corporation can utilize the same report and the borrower only has to pay once for the reports