Current SBA 504 rates
There are three parts to a typical SBA 504 loan.
Conventional bank mortgage loan covering approximately 50% of the total fixed asset costs.
SBA 504 second mortgage loan covering approximately 40% of the total fixed asset costs.
The borrower’s contribution covering 10% *
* If the fixed asset being purchased is special use real estate, a 15% contribution is required from the borrower. If the property is special use and involves a start-up operation, a 20% contribution is required.
Six Bridges Capital Corporation approves its portion of the fixed asset financing request and works with the first mortgage lender to approve its senior permanent loan as well as the interim construction loan, if necessary.
Details of an SBA 504 Loan
The SBA 504 Loan can finance the purchase of real estate and the construction or renovation of buildings. It may also be used to purchase machinery, equipment, furniture, fixtures and project related soft costs. Refinancing of existing debt (limited to 50% of expansion project) may be included in the 504’s total project cost. Eligible business expenses may also be refinanced under certain parameters.
SBA 504 portion of the total fixed asset project costs cannot exceed:
- $5,000,000 Subject to Job Creation Goals
- $5,000,000 Subject to Public Policy Goals
- $5,500,000 Small Manufacturers
- $5,500,000 Energy consumption reduction or renewable energy generation
The SBA 504 loan has a term of 20 years for commercial real estate and a term of 10 years for machinery and equipment, both fully amortizing.
Prepayment penalties will apply. The SBA 504 twenty (20) year fixed rate loan has a 10 year prepayment penalty and the 504 ten (10) year fixed rate loan has a 5 year prepayment penalty. Both are required by SBA and are not negotiable. The 504 debenture interest rate sets the percentage of the prepayment penalty and is reduced by 10% each year for the first 10 years on a 20 year loan and reduced by 20% each year for the first 5 years on a 10 year loan.
- SBA Funding Fee 0.25% of the 504 loan amount
- 6BCC Processing Fee 1.5% of the 504 loan amount
- Underwriter Fee 0.4% or 0.375% of the 504 loan amount (20 or 10 year loans)
- Closing Costs (flat fee) $2,500
An ongoing guarantee fee equal to .625% of the principal balance of the SBA 504 Note calculated at five-year intervals beginning with the first payment. This fee is included with the monthly SBA 504 payment.
An ongoing CSA Fee of .1% per year is charged and is included with the monthly SBA 504 payment.
An ongoing borrower fee of .749% per year will be charged and included with the monthly SBA 504 payment.
A second lien position on the 504 project assets will be considered adequate when the applicant meets all of the following criteria:
- Strong, consistent cash flow that is sufficient to cover the debt;
- Demonstrated, proven management;
- The applicant business has been in operation for more than 2 years
- The proposed project is a logical extension of the applicant’s current operations.
If one or more of the above factors is not met, additional collateral and/or increased equity contribution may be required. Because leasehold improvements provide minimal collateral value, Six Bridges Capital Corporation must always consider requiring additional collateral in this situation.
All principals who own 20% or more of the business are required to provide a full guarantee. Principals and key managers owning less than 20% may be required to provide a guarantee on a case-by-case basis.
When necessary to secure a collateral position, SBA will require the guarantee of a non-owner spouse to the extent of the spouse’s interest in the collateral.
The guarantee of affiliated companies may be required based on the percentage of ownership of the affiliate and the borrower’s relationship with the affiliate.
DEBT SERVICE REQUIREMENTS
SBA 504 Loans are for strong healthy companies that are able to demonstrate the ability to repay the loan through either:
- Historical cash flow of 1.2:1
- Global cash flow of 1.25:1
- Projected cash flow of 1.25:1
Loans can generally be made to all for-profit small businesses except those that do not meet SBA 504 eligibility requirements. These are primarily small businesses engaged in lending, loan packaging, investments, pawn shops, passive real estate investments, life insurance companies, small businesses located in a foreign country or owned by illegal aliens, pyramid plan sales, gambling, businesses which restrict patronage or promote a religion, cooperatives, non-profits, or individuals of poor character or on probation or parole.
Other Considerations & Requirements
CASH / EQUITY / ASSET INJECTION
Evidence must be provided by the applicant prior to any loan closing and disbursement.
SUBORDINATION / STANDBY DEBT AGREEMENTS
Standby creditor must subordinate any lien rights in collateral securing a loan to the lender’s rights in the collateral and agree to take no action against applicant or any collateral securing the Standby Debt without lender’s consent.
REAL ESTATE APPRAISALS
Required for all Real Estate purchased or used as collateral.
Required to substantiate the value of any used machinery and/or equipment.
Required for all Real Estate purchased or used as collateral.
A late charge (not to exceed $100.00) in the amount of five percent (5%) of the amount of any payment which is not made within ten (10) days of the date the payment is due will be collected from the Borrower.
Six Bridges Capital Corporation must document that the borrower used the loan proceeds for the approved purposes.
Property insurance (fire and theft, extended coverage and liability) will be required. All personal and real property shall be insured for replacement cost. Insurance coverage for improvements to real property must contain a Mortgagee Clause in favor of lender. Insurance coverage for personal property must contain a Lender’s Loss Payable Clause in favor of lender. Additionally, the policy must provide written notice at least 10 days prior of policy cancellation.
The key principals of the operating company may be required to provide an assignment of life insurance in the amount of the loan.
Will be required if the property is located within a flood area.
WORKERS’ COMPENSATION INSURANCE
Will be required in amounts meeting state law requirements.
VERIFICATION OF FINANCIAL INFORMATION
Six Bridges Capital Corporation must verify the applicant’s last 3 years (unless applicant is a start-up business) of tax returns submitted to IRS via IRS Form 4506-T.
Lease(s), including options, on all business premises where collateral is located should be for as least as long as the term of the loan.
ASSIGNMENT OF RENTS
A perfected assignment of all rents paid under a lease between an Eligible Passive Concern (Real Estate Holding Company) and the applicant Operating Company is required.
Applicant must provide lender access to any leased premises and facilities where collateral is located with an executed Landlord’s Waiver.
Evidence of compliance with the “National Earthquake Hazards Reduction Program Recommended Provisions for the Development of Seismic Regulations for New Buildings” (NEHRP) or a building code that has substantially equivalent provisions is required.
Do-it-yourself construction or installation of machinery & equipment—except under special circumstances—will not be permitted.
Applicant must show ability to pay cost overruns, if any.
Applicant must provide lien waivers or releases from all materialmen, contractors, and subcontractors involved in any construction.
- Existing Real Estate Improvements occupy at least 51% of the property.
- New Construction occupy at least 60% of the property.
All franchised operations not listed on the Franchise Registry must pass a legal review of the applicant’s Franchise Agreement and Franchisor’s Disclosure Statement.
Certification from applicant that any required child support is no more than 60 days delinquent.
Applicant must be current on all federal, state, and local taxes, including but not limited to income taxes, payroll taxes, real estate taxes, and sales taxes.
GOOD FAITH DEPOSITS
A Good Faith Deposit (see below schedule) shall be required and applied to Six Bridges Capital Corporation’s processing fee and other costs associated with credit investigation and underwriting. If approval is not obtained, the Good Faith Deposit shall be refunded (less the cost of credit verification, environmental screening, IRS filing verification and any other out of pocket expenses incurred by 6BCC).
- $2,500 SBA 504 Debentures of $500,000 and less
- $3,500 SBA 504 Debentures of $500,001 to $999,000
- $5,000 SBA 504 Debentures of $1,000,000 and over
Neither the Borrower nor Operating Company has been determined by the Secretary of Homeland Security or the Attorney General to have engaged in a pattern or practice of hiring an alien, recruiting an alien or referring an alien for a fee for employment in the United States, knowing that the person is an unauthorized alien.
IS THERE A “GRACE PERIOD” ON MY LOAN?
Your loan is due on the first business day of every month. The terms of your loan agreement require the payment to be made by Automated Clearing House (ACH) transfer from your bank to Colson Services Corporation, also known as the Central Servicing Agent (CSA) for a SBA 504 loan. If your payment is rejected when the ACH transaction occurs, you may wire the funds as an alternative. To avoid any late fees associated with a SBA 504 loan, your loan payment must be posted at Colson by the 15th of the month. To avoid any late fees associated with an Arkansas Capital Corporation loan, your loan payment must be posted by ACC by the 10th of the month.
WHAT IS THE ROLE OF 6 BRIDGES CAPITAL CORPORATION IN MY SBA 504 LOAN?
6BCC has contracted with the SBA to serve as an intermediary for your SBA 504 loan. When you secured your SBA 504 loan, the second mortgage portion was packaged, underwritten and funded by 6BCC. After your loan funds, 6BCC is responsible for monitoring your repayment and loan covenant(s) compliance. Your loan is an obligation to the U.S. Small Business Administration (SBA), an Agency of the U.S. Government – not 6BCC. 6BCC makes recommendations to the SBA on actions associated with your loan which SBA reviews and either approves or denies.
WHAT IS A SBA 504 LOAN DEFERMENT?
When borrowers provide 6BCC with financial statements (tax returns, personal financial statements, interim business financials, and other requested information) that indicate their business is operating with lower revenues and tighter cash flow than historically, a loan deferment may be possible. A deferment typically provides a lower monthly payment amount to provide cash flow relief. The principal and interest obligations remain in force, but the payment amount is adjusted for the “deferment period.” When the deferment period ends, the borrower will make payments under a set catch-up plan until the borrower is in line with the amortization schedule.
WHAT IS A SHORT SALE?
When a property is sold for less than what is owed on it, it is referred to as a short sale. All owners, lenders, and/or parties holding a valid lien on title must agree to the transaction before the sale can occur. The borrower remains obligated for the outstanding balance owed after the sale is completed and works with the lender(s) to develop a repayment plan for the deficiency balance remaining. For example, if a borrower’s debt on a building is $500,000 and the building is sold for $450,000; the borrower remains obligated on the outstanding $50,000 loan balance.
WHAT IS A FORECLOSURE?
When a borrower does not pay as agreed to through their loan instruments, the lender has the right to sell the property without the borrower’s consent through a foreclosure process. Foreclosure processes vary from state to state.
IF I DEFAULT ON MY SBA LOAN, WHAT WILL HAPPEN?
When you received your SBA loan, you agreed to repay the entire balance. Most SBA loans have several “obligors” or “guarantors” that signed the note. Each obligor or guarantor is solely responsible for the entire outstanding balance of the loan. For example, if two business partners secured a loan for $100,000 and the loan defaults, both partners are responsible for the outstanding balance until the loan is paid off. The debt obligation is not divided among responsible parties. If the debt is not repaid or compromised, the loan file is referred to SBA and then to the U.S. Department of Treasury (DOT). DOT has the right to withhold future income tax refunds, social security benefits, veteran benefits as well as the right to impose future wage garnishments, and other means of collection available to them including legal action until the full balance of the loan is repaid. These actions may be imposed on all obligors and guarantors on the note. Additionally, the loan default is reported to all credit agencies which impacts credit scores and ability of obligors and guarantors on their ability to secure conventional and SBA financing into the future.
WHAT CAN I DO TO AVOID THESE SERIOUS ISSUES?
We suggest that you contact Arkansas Capital Corporation or 6BCC as well as your first mortgage holder, if any, as early as possible and work collectively toward alternatives to default and foreclosure. ACC and 6BCC have the right to work with all debtors on their SBA 7(a) or SBA 504 loan toward a warranted repayment strategy or compromise which is then presented to the SBA for their consideration and is then formally approved or denied. We have successfully completed justifiable loan deferments as well as long term repayment strategies on outstanding loan balances after short sale or foreclosure that are manageable for borrowers.
We have found over and over again that the earlier a borrower, obligor or guarantor informs us of their challenges – the better the options available for resolution. Lender(s) and borrower(s) enter into debt obligation(s) in good faith and the extension of credit is based on the promise to repay by borrower(s). It is important borrower(s) acts in good faith when negotiating solutions with your lender(s) as this allows the lender(s) to review all repayment options at borrower(s) disposal.
Self-Directed Retirement Funds
Unconventional IRA Structure Provides Little Known Business Funding Options
Although thousands have discovered this golden opportunity, some of the savviest lenders and borrowers are still unaware of this remarkable funding option: Individuals can utilize their IRA monies before retirement age to purchase a business or leverage a loan without incurring early distribution penalties.
Thanks to the government’s 1974 ERISA laws, borrowers can self-direct up to 100% of their retirement funds into investments that include the purchase of a business or franchise. This option is ideal for those who want to improve their odds of securing leverage by providing a substantial down payment on SBA, conventional, commercial or other loans. While IRA, 401(k), Keogh, SEP, and other retirement funds could be used in this way for the past three decades, it’s only been in recent years that business and franchise buyers have begun seizing this opportunity.
By using a structure similar to that of a self-directed IRA, a borrower can help finance their entrepreneurial endeavor. The benefits and risks of tapping IRA funds to help finance a business or franchise purchase can be many and we recommend that you speak to a professional in this area along with your accountant and attorney.
Q: How do I change the account from which payments are deducted?
A: Complete a new Authorization Agreement and fax or e-mail to 6 Bridges Capital Corporation (6BCC) by the 13th of the month prior to the change. Be sure to sign and date the form. Forms received after the 13th will not become effective until the following month. For example, if a form is received January 13, the change will be effective February 1. If the form is received January 16, the change will be effective March 1. A voided check from the new account must be included with the completed signed agreement; send as a separate page.
Q: Why is my payment higher than the amount shown on the note?
A: Your payment includes fees being paid to SBA, Central Servicing Agent and 6 Bridges Capital Corporation. These fees are adjusted downward at 5-year intervals.
Q: Why is the rate on my note different than what was estimated during the loan process?
A: The rate on the loan is determined approximately one week prior to the date the loan is funded and is based on current market conditions. Typically they follow the trends of treasury rates. The loan is pooled with all of the other SBA 504 loans funded in the same month and sold in the form of debentures.
Q: How do I know what I paid in interest and fees for last year?
A: Your amortization schedule will provide accurate information regarding interest and fees as long as payments are paid in a timely manner. Also, Wells Fargo sends notices by January 31 itemizing interest and fees paid for the prior year.
Q: How can I pay off my loan?
A: Unlike standard bank loans, SBA 504 debenture-funded loans must follow strict guidelines. Loans may pre-pay only on the third Thursday of each month. 6 Bridges Capital Corporation must receive a written request from the borrower at least 15 days prior to the pre-payment date. Also, there may be a pre-payment premium and interest due. For more specific information, see Prepayment Guidelines.
Any questions, issues or concerns you may have regarding your loan should be directed to 6 Bridges Capital Corporation; we are your conduit to SBA and Wells Fargo.
Q: Can I refinance my first mortgage loan without pre-paying my SBA loan?
A: Generally, your first mortgage loan has a higher interest rate than the SBA 504 loan. If you decide to refinance this first mortgage loan, 6 Bridges Capital Corporation will subordinate to a straight refinance (cash-out may be allowed if the proceeds are used for building improvements) of your first mortgage loan – 6 Bridges Capital Corporation charges no fees for this service.
Q: Is my loan assumable?
A: An assumption fee may be charged.
Refinancing of Eligible Business Expenses
- Secured debt that has been outstanding for over two years with all payments current within the last twelve months
- Business Operating expenses such as salaries, rent, utilities, inventory and other obligations of the business that were incurred or that will be come due within 18 months are eligible
- Loan to value of no more than 90%
- Operating expenses loan to value of no more than 75%
- Expenses related to an expansion of the business are not eligible