Frequently Asked Questions and Resources

HomeFrequently Asked Questions and Resources

General Information

A. Established by Congress in 1986, the SBA Loan Program is the first national financing program to recognize contributions of small and medium sized businesses toward local economic development and job growth in the U.S.. The progam provides healthy, expanding businesses with long-term, below-market, fixed-rate financing for the acquisition of land and building, machinery and equipment and construction and renovation.

A. 504 loans have many advantages, including long-term, below-market, fixed-rate financing and equity requirement of 10% or more from the customer. In addition, the lender can provide 90% financing for the customer, can participate in larger transactions and enjoy first lien, lending 50% of value at market rate and fees.

A. For-profit businesses with a tangible net worth not to exceed $15 million and a net profit not to exceed $5 million (after taxes).

A. Ineligible borrowers include non-profits, lending institutions, and insurance companies, as well as borrowers affiliated with speculative development, gambling concerns and private clubs.

Funds can be used as follows:

PURCHASE OF:

  • Land
  • Building
  • Machinery and Equipment
  • Construction of New Property

 

REFINANCE:

  • Existing Commercial Real Estate Debt
  • Existing Machinery and Equipment Debt
  • Other business debt

A. Ineligible use of funds includes working capital, inventory and rolling stock.

A. Private lenders must participate for a minimum 10-year term on real estate and a minimum 7-year term on machinery and equipment under market rates and fees, including a one time 0.5% fee to the SBA. The lender establishes covenants.

A. The SBA has two main lending programs: the 504 and the 7(a). The 7(a) program is the largest program in the SBA portfolio.  This program is typically utilized for non-real estate transactions, provides floating rates and has additional collateral requirements.

Application Specific FAQs

A. The source of equity can come from a person/business cash or gifted funds that you don’t have to repay. The equity injection may be borrowed if the business can sustain all of their debt obligations; however, the note may need to be on standby.

A. We generally like to see that you are current on all debt and that past issues occurred greater than two years ago. For all past issues, you will need to provide a reasonable explanation as to what happened.

A. There is a prepayment penalty for the SBA portion of the note. In the event you would like to reduce principal, you may typically be able to pay down the private lender portion without a penalty.

A. An ASBC professional can provide general terms and structure based upon a specific location. To formally apply, an executed contract or term sheet is necessary.

A. If the business is less than 2 years old a plan is required. An ASBC professional can point you in the right direction to obtain assistance.

Fees/Rates

A. The SBA fees are 2.17% of the SBA loan amount. All of these fees are financed into the SBA loan and are paid out over the 20/10 year loan.

A. An SBA approved attorney typically charges $2500 for their work in closing and funding the 504 loan. This $2500 may also be financed.

A. 504 loan rates are determined based upon the sale of a pool of government guaranteed securities. The rate is indexed off of the ten-year treasury yield which fluctuates daily.  Once the rate is set, it is fixed for the term of the SBA/ASBC loan.

A. Our participating lenders charge market rates on their portion (typically 50% of the project).

A. The rates are set on the following dates for the 2017 calendar year:

  • 1/5/17
  • 2/9/17
  • 3/9/17
  • 4/6/17
  • 5/11/17
  • 6/8/17
  • 7/6/17
  • 8/10/17
  • 9/7/17
  • 10/5/17
  • 11/9/17
  • 12/7/17

A. Effective rates are published monthly by NADCO that correspond to the securities sold that month. FBDC publishes NADCO rates in the ticker on our website.  It is important to note that your final rate will be determined when your SBA loan funds.

Resources

The SBA 504 Loan has lower down payment requirements and also provides 20/10 year fixed rates. Having fully fixed rates reduces the risk of rate volatility over the life of the loan which provides certainty and makes the 504 loan a competitive alternative.

By putting less money down, the business is able to save liquidity and reinvest that within their firm.  Putting 20% down can be cost prohibiting for many small businesses.

The following table depicts a comparison between the SBA 504 Loan and a conventional loan:

SBA 504 Loan Conventional Bank Loan
Loan Amount Up to 90% financing (inclusive of land, construction / renovations, soft and closing costs) 60% to 80% financing (depending on the property type)
Equity As little as 10% of the total project costs 20% to 40% plus closing and soft costs
Term 10 or 20 years fixed (no balloons or rate variability) 3, 5, 7 or 10 year balloons
Amortization 10 or 20 years Typically 20 years
Pricing Fixed for the full term indexed off of the 10 year treasury yield Variable or fixed for the term of the loan
Personal Guarantees Required by 20% or more owners Typically Required
Prepayment Penalty For the SBA loan there is either a 5 or 10 year prepayment Varies by lender
Fees Overall costs are typically 1.5% of the total project cost with the ability to finance the majority of the costs Typically 1% of the loan amount
Personal Credit Scores No specific requirement; however, lower scores will require thorough explanation Varies by lender
Economic Development / Public Policy Requirement Required for all SBA 504 Loans Not a requirement

The following table depicts a comparison between the SBA 504 Loan and the SBA 7(a) Loan.

SBA 504 Loan SBA 7(a) Loan
What is primarily financed? Real estate and heavy equipment

Refinance of commercial debt associated with prior real estate or equipment debt

Working capital, inventory, equipment, stock, or any other business asset and/or debt to be refinanced
Why is the program typically used? Low down payment and long term fixed rates Ability to enhance credit, low down payments, mitigate collateral shortfalls
Loan Structure 1st mortgage made by lending partner

2nd mortgage SBA /

ASBC loan

Typically a single loan made and serviced by a 7(a) provider
Loan Size $150,000 – $25 million $150,000 – $5 million
Interest Rate 1st mortgage: conventional pricing

2nd mortgage: below-market fixed interest rate

Typically floating at WSJ Prime +1% up to WSJ Prime +2.75%
Term 1st mortgage 10 year (minimum)

With 20-25 year amortizations

2nd mortgage 10 or 20 years, fully amortizing

Up to 25 years, fully amortizing for real estate

Up to 10 years, fully amortizing for all other uses

Prepayment Penalty For the SBA loan there is either a 5 or 10 year prepayment Typically a 10 year declining prepayment
Fees Overall costs are typically 1.5% of the total project cost with the ability to finance the majority of the costs 3% guarantee fee based upon the entire project amount
Additional Collateral Not a typical requirement Required when the equity in the project is less than 15% of the project
Personal Credit Scores No specific requirement; however, lower scores will require thorough explanation Varies by lender
Economic Development / Public Policy Requirement Required for all SBA 504 Loans Must meet SBA’s 7(a) size standards
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We look forward to working with you on SBA 504 financing opportunities.

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