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- How long does it take to obtain approval for a 504 loan?
- What is the minimum down payment required?
- How much does a 504 loan cost?
- What will be my interest rate on the 504 loan?
- Is there a penalty if I prepay my loan?
- Can I personally hold title to Project Property and lease it to my business?
- Will I need to personally guarantee the SBA 504 loan?
- Will I need to pledge my home as additional collateral?
How long does it take to obtain approval for a 504 loan?
A lot depends on the borrower. With complete information and documents, we can pull together the loan package relatively quickly. The timing often depends on obtaining the appraisal and environmental reports as early as possible. All things being equal, California Statewide routinely meets the demands of a 45-day escrow. It is always good advice to bring us into the process early in order to discuss the project timing. In any event, SBA loans do not take longer to close than conventional loans.
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What is the minimum down payment required?
A minimum down payment of 10% is required for most 504 projects. However, a 15% down payment is necessary when a business is a start-up enterprise (less than 2 years old) or when the project property is considered special-purpose. A 20% down payment is required in situations involving both a start-up business and a special-purpose property.
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How much does a 504 loan cost?
When your loans close and your SBA 504 loan is funded, you'll incur various fees totaling approximately 0.65% of your loan amount, plus an attorney closing fee of $2,000. These fees are financed within the debenture loan proceeds so they are not out-of-pocket expenses. Fees are broken down as follows:
- CDC Processing Fee of 1.5% of net debenture amount
- Reserve Deposit Fee to cover loan deficiencies and to defray operating costs of the program of .5% of net debenture amount paid to SBA
- Loan Funding Fee, paid to SBA of .25% of net debenture amount
- Underwriting Fee paid to private market for selling the debenture
- Attorney Loan Closing Fee for preparation of loan-closing documents
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What will be my interest rate on the 504 loan?
The interest rate on the loan will be determined by a market sale of the bond at the time the 504 debenture pool (the pool of 504 loans) is sold and the interest rate will be fixed for the term of the loan. It is this 100% government guarantee that experts predict will enable the bond to be funded at below conventional lending interest rates and on a fixed rate basis. The effective rate (which includes all ongoing fees) is roughly equal to the 10-year Treasury bill rate when the debenture is sold, plus approximately 2.2-4.2%.
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Is there a penalty if I prepay my loan?
Yes. However, the amount of the prepayment penalty decreases each year and disappears after year five for a 504 loan with a 10-year maturity and after year 10 for a 504 loan with a 20-year maturity. The formula for calculating the prepayment penalty on a 20-year 504 loan is as follows:
| PP | = | D (I x P), where |
| D | = | the remaining principal balance of the Debenture |
| I | = | the interest rate stated on the face of the Debenture expressed in decimal points |
| P | = | the factor set forth below for the applicable year: |
| Year | P |
|---|---|
| 1 | 1.00 |
| 2 | .90 |
| 3 | .80 |
| 4 | .70 |
| 5 | .60 |
| 6 | .50 |
| 7 | .40 |
| 8 | .30 |
| 9 | .20 |
| 10 | .10 |
| 11 and thereafter | 0 |
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Can I personally hold title to Project Property and lease it to my business?
Yes. SBA allows for individuals, trusts, LLCs, corporations or partnerships to hold title to the Project Property so long as it is leased to the Operating Company.
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Will I need to personally guarantee the SBA 504 loan?
SBA requires guarantees from all individuals and legal entities that hold a 20% or more ownership interest in either the Project Property or the Operating Company.
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Will I need to pledge my home as additional collateral?
No. In the majority of projects, the Project Property will be the sole collateral securing an SBA 504 loan. Additional collateral is only required when there is a deficiency in the appraised value of the Project Property or when other serious credit issues are apparent.
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