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Structuring Your SBA 504 Loan

Aug 27, 2021

The SBA 504 loan program is one of the best kept secrets in the small business financing world today.

The program can finance long-term fixed assets and offers many benefits, including a minimum 10% down payment, fixed below-market interest rates, and up to 25-year terms.

Because there are several eligible uses for the loan program, there are many different ways an SBA 504 loan can be structured. Below are just a few common examples of how the SBA 504 loan program is set up and the pieces that come together to make it possible.

Example 1 – Purchase & Renovation of Real Estate Plus Equipment for an Existing Business

Existing daycare is seeking financing for the purchase of real estate, renovations, eligible equipment, and professional fees. The total project will be $875,000.

As listed above, the breakdown of sources will 50-40-10 – the most basic structure for the SBA 504 loan program.

Example 2 – Straight Purchase of Existing Business with New Ownership

Purchase of existing veterinary clinic by a new owner with $800,000 for real estate, plus eligible equipment and professional fees. The total project will be $860,000.

Any blue sky/good will, inventory, and ineligible equipment for the business acquisition must be financed separately outside of the 504 project.

*The borrower will be required to inject 15%, as this is considered a change of ownership.

As listed above, the breakdown of sources will be a 50-35-10 structure.

Example 3 – Straight Purchase of Existing Business with New Ownership (& Special Purpose Property)

New owner seeking financing to purchase existing bowling alley, as well as eligible equipment and professional fees. The total project will be $910,000.

Any blue sky/goodwill, inventory, and ineligible equipment for the business acquisition must be financed separately outside of the 504 project.

As this is considered a special purpose property by SBA, the borrower is required to inject an additional 5%.  Due to the fact that this is a change of ownership, an additional 5% is required to be injected by the owner, increasing the total borrower injection to 20%.

*To be considered special purpose property, the property must have limited utility and marketability other than its original use. Some examples of special purpose property include: amusement parks, bowling alleys, car washes, cemeteries, funeral homes, gas stations, golf courses, hospitals or urgent care facilities, hotels and motels, museums, nursing homes, swimming pools, theaters, and more.   

Due to the special purpose property, the project structure will be as follows:

Example 4 – Ground Up Construction

Existing dental practice seeking financing to purchase land and construct a new building for their dental practice, which will include the purchase of eligible equipment. The total project will be $1,675,000.  

As noted above, the structure for this project will be the typical 50-40-10 structure.

Example 5 – Debt Refinance with Expansion

An existing ice cream shop is building an addition to expand capacity. Cost of the expansion is $1,000,000. The business has an existing mortgage with a balance of $900,000 outstanding that incurred 12 months ago.

For this project, the sources will be structured as follows:

  • 46% – TPL
  • 40% – SBA/DBL
  • 14% – Borrower Injection
Example 6 – Straight Debt Refinance of Government Guaranteed Debt & Cash Out

Ice cream shop with an existing SBA 7a or 504 loan from original construction of their building. The business has a $1,000,000 balance on that loan that was incurred 5 years ago. Because of COVID-19, they are needing additional working capital to get through the winter.

Cash out for business operating expenses is limited to 20% of appraised value and a maximum loan-to-value of 85%.

The structure for this straight refinance project will be as noted below:

 

As you can see, the SBA 504 loan program is a great financing option and provides a variety of benefits to small businesses.

If you have questions about your current project or want to know more about the SBA 504 loan program, how its structured, and what is eligible, contact one of our loan officers in your area.