Everything You Need to Know Before Applying
504 loans can change the game for companies wishing to invest in their growth because of their reasonable repayment terms and low-interest rates. A 504 loan does raise certain frequent questions, just like any other form of funding. This article will answer some of the 504 program’s most frequently asked questions.
The Small Business Administration (SBA) has a financing option called a 504 loan that offers long-term, fixed-rate financing for purchasing fixed assets like real estate and machinery. The loan is set up as a partnership between the borrower, who contributes 10% of the financing, a participating lender, who contributes 50% of the financing, and a Certified Development Corporation (CDC), which provides 40% of the funding.
Fixed assets like commercial real estate, structures, machinery, and equipment can be bought with a 504 loan. The loan money may also be used to upgrade or renovate current property. The loan, however, is not permitted to be used for working capital, inventory, or restructuring current debt.
Depending on how the money from the loan will be used, a 504 loan has a set interest rate and a repayment period of 10, 20, or 25 years. A 504 loan’s interest rate is calculated by adding a spread decided by the CDC and the participating lender to the prevailing market rates for 5- and 10-year Treasury bonds.
A 504 loan can be used to borrow up to $5 million. A few exceptions, such as manufacturing, may be eligible for up to $5.5 million in financing.
Your company must have a tangible net value of less than $15 million and an average net income over the previous two years of less than $5 million to qualify for a 504 loan. Also, at least 51% of the property that is being funded must be occupied by your company.
The complexity of the project and the borrower’s responsiveness are two variables that can affect how quickly a 504 loan is approved. Nonetheless, the SBA advises borrowers to budget at least 60 to 90 days between the time of application and funding.
You must engage with a Certified Development Company (CDC) in your area to apply for a 504 loan. The CDC will walk you through the application procedure and assist you in deciding whether a 504 loan is the best form of finance for your company. Also, it would be best if you negotiated with a lending partner who will contribute 50% of the project’s funding.
Typically, the funded assets, such as real estate or equipment, are needed as collateral for a 504 loan. More security may be required, depending on the loan’s amount and the project’s estimated risk.
Yes, prepaying a 504 loan without incurring any fees is possible. To offset the expenses of loan issuance, the CDC may impose a prepayment penalty if you pay off the loan before it has completed the first half of its term.