SBC Loan Programs
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SBA 504 Loan Program
The premier SBA loan program for commercial acquisitions, the 504 Loan is designed to provide financing for the purchase of fixed assets, which usually means real estate. As part of its mission to promote the development of small business, the SBA offers a number of different loan programs tailored to specific capital needs of growing businesses, one of which is the 504 program. The 504 program works by distributing the loan among three parties. They are: the borrower, the lender, and the CDC or the Certified Development Company. The business owner injects a minimum of 10% of the project cost, a conventional lender will fund 50% of the purchase price, and the CDC funds the remaining 40%. The maximum loan amount for a 504 loans is $5,000,000. If the borrower defaults, the private sector lender is paid off first, reducing the risk to the lender and encouraging loans.
What is a CDC?
Certified Development Companies are established under the 504 code as non-profit corporations set up to support economic growth in their local areas. There are over 250 CDC's nationwide. Typically, they are the ones taking the second trust deed and funding 40% of the 504 loan.
What happens if we decide to inject more than 10%?
The lender will always have a 50% interest in the loan. If you decide to inject more than 10%, say 15%, then the remaining funds will be taken out of the CDC portion of the loan.
In order to qualify for the program, the business must occupy at least 51% of the subject property. For Example: if the lot size is 10,000 square feet, at least 5,100 square feet must be occupied by the business to become eligible under this program. The remaining 4,900 square feet may be used in various ways such as leasing out to another company.
The lenders first trust deed will typically have a 25 year amortization with a 3, 5, 7 or 10 year fixed rate, depending on lender programs at the time. The interest rates vary from lender to lender due to the competitive nature of conventional banks.
The Second Trust Deed will have a 20 year fixed rate. All CDC's will have the same interest rate across the country.