SBA 504 program for startup businesses

In response to the notes about the Neighborhood Retail Summit presentation from Tuesday, about the Small Business Administration 504 loan program, Jerry Chautin, a SCORE volunteer business counselor, writes:

Please note that start up businesses can qualify for SBA 504 loans but the down payment would be 15% instead of 10%.

The U.S. Small Business Administration's 504 program was is intended to create jobs based upon a formula that has been modified several times over the years. Particular preference is given to rural, economically disadvantaged areas and minority and female applicants for which SBA may waive the job creation requirement. The loan proceeds must be used to finance long-term assets such as real estate and fixtures which makes the program ideal for construction, for expansion of manufacturing facilities and other job intensive structures.

LOAN AMOUNT

Typically $250,000 and up. Because of the complicated processing, lower loan amounts are often relegated to other loan programs and higher amounts may be too risky for most lenders. 504 loans are processed by SBA-licensed Certified Development Corporations (CDC). The CDC creates a SBA guaranteed subordinated debenture (similar to a 2nd mortgage). The debenture, up to $1.5 million ($4 million for manufacturing) is piggy-backed with a conventional first mortgage of any amount. It's usually provided by a local bank. The borrowing Small Business Concern (SBC) makes one payment to the CDC which is then proportionately paid to the bank and to the trustee for the debenture holder.

INTEREST RATE

The debenture rate is fixed at closing at a rate close to treasury securities of like term. Banks may charge a fixed or floating market rate for their conventional portion along with points and fees. The result is a blended rate to the SBC. The CDC also charges fees.

TERM

The SBA portion is usually 20 years and the conventional portion is usually 10 years.

SUITABLE BORROWERS

For-profit SBCs with a history of success in the same industry for which the funds are to be used. There are some company size and industry type exclusions.

LOAN TO COLLATERAL VALUE OR COST

Up to 90% of the cost for existing SBCs, 85% for start-ups. A classic percentage approved by SBA is where the bank's conventional loan is 50%, the debenture is 40% and the SBC provides 10% or more. An example financing of a $1,875,000 plant expansion might look like this:

· $750,000 -- SBA Subordinated debenture @ 6% fixed for 20 years.
· $937,500 -- Bank conventional loan @ 8%, 10 years adjustable every 3 years.
· $1,687,500 -- Total loan @ blended rate and term.
· $187,500 -- Minimum cash requirement from SBC
· $1,875,000 -- Total plant expansion

The 504 loan has numerous fees, requirements and restrictions. Begin by locating the CDC covering your area to discuss the specific proposal. Click here for details on the loan program.

SBA 7a Term Loan Guaranty Program
by Jerry Chautin, SCORE volunteer business counselor

The U.S. Small Business Administration's 7a program provides loan guarantees to approved banks and some other approved lenders. In the event of default by the borrowing Small Business Concern (SBC), the SBA is willing to reimburse up to 85% of the loss that the lender would otherwise sustain. Consequently, lenders may be willing to accept a greater credit risk and grant more favorable terms than they might otherwise. SBA also has a revolving line of credit loan guaranty program but very few banks are willing to participate. SBCs that are poor credit risks or fail to clearly articulate their ability to repay the loan will probably be rejected.

Loan Amount

$100,000 to $2 million. Although the SBA encourages lenders to make loans as low as $10,000, the paperwork is too extensive and the bank's set up costs too high to make small loans cost effective. However, smaller banks are often motivated to consider lower loan amounts conventionally and through SBA for existing customers with creditworthy proposals. Some large banks consider making smaller Express Loans to existing businesses with a strong history of cash flow. Two banks make Community Express Loans to under-served borrowers in the $5,000 to $50,000 range and may accept tainted credit histories and no collateral.

Suitable Borrowers

For-profit SBCs with good credit (business & owners) and a history of sufficient cash flow. Some small community banks make loans to start-up SBCs and require more cash assets, collateral and experienced ownership. SBA defines the maximum size of the business by industry and is based upon ether gross revenues or number of employees. Most SBCs qualify. A few industry types are excluded from SBA programs.

Purpose of the Loan

To expand, acquire or start a small business. Weaker proposals normally require substantial collateral, such as real estate while stronger proposals are sometimes accepted with less substantial collateral, such as fixtures and equipment.

Loan to Collateral Value or Cost

Up to 90% of cost or value is possible for well-established SBCs with quality collateral. 70-80% more typical for most start-ups. Lenders have other critical ratios related to cash flow, liquidity and assets that limit the loan amount available. Credit requirements, collateral prerequisites, cash flow minimums and loan amounts vary among SBA approved lenders. Most have requirements that are more severe than the minimum acceptable to SBA. Be sure to understand what your lender requires before you make application.

Click here for details on SBA's financing programs.