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Home SBA Loan Basics What is an SBA 504 Loan?
What is an SBA 504 Loan? PDF Print E-mail

SBA loan must provide US jobsThe United States Government formed the Small Business Administration (SBA) in 1953 to help businesses get established and grow. The SBA 504 Loan Program is an economic development program that offers small businesses another way to get business financing, while promoting business growth and job creation. As of February 15, 2012, the SBA 504 Loan Program has provided $50 billion to help small business owners while creating over 2 million jobs.


The SBA 504 loan program is a partnership that includes the SBA, the borrower, and the lender; each of these "partners" provides a portion of the financing. Up to 40% of the total project cost is provided through one of the SBA’s Certified Development Companies (CDC’s), funded through an SBA-guaranteed debenture. Up to 50% is provided by the commercial lender through World Net Capital I. The borrower has to contribute at least 10% of the project cost. The commercial lender’s portion of the loan does not carry the same benefits as the 504 loan program. The lender determines the interest rate and term of it's 50% portion, and it does not come with the federal guarantee.


One of the main advantages of an SBA loan is the low down payment needed by the borrower. The LTV of an SBA loan is typically 90%, which means that you can borrow up to 90% of the property value, reducing your down payment to just 10%. An LTV ratio of 90% is probably the best ratio you can get for a commercial loan.


SBA loans have several other benefits to the small business owner. The interest rates are generally lower since 40% of the loan carries a federal guarantee. (The interest rate for the entire loan is a composite of the rate on the SBA portion and the commercial lender portion.) SBA loans can be used for long-term financing with 20-year terms, fixed interest rates, and no balloon payment. As a result of these improved loan criteria, the borrower's payments can be smaller resulting in improved cash flow.


The Certified Development Company is a nonprofit corporation that promotes economic development within a community through 504 loans. CDC’s are certified and regulated by the SBA, and work with the SBA and participating lenders to provide financing to small businesses to accomplish the goal of community economic development. There are over 260 CDC’s nationwide with each having a defined area of operations covering a specific geographic area.


While there is no maximum project size, the maximum SBA guaranteed loan amount (debenture) is $5 million. Small manufacturers or specific types of energy projects may qualify for a $5.5 million debenture.


Last Updated on Thursday, 12 September 2013 14:46

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