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The SBA 504 Loan Program. A “Win-Win” for the bank and the small business! . www.seedcorp.com. Updated by SEED Corp. 8/12. What is the SBA 504 Loan Program?. It is the Small Business Administration’s “economic development financing program”.
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The SBA 504Loan Program A “Win-Win” for the bank and the small business! www.seedcorp.com Updated by SEED Corp. 8/12
What is the SBA 504 Loan Program? It is the Small Business Administration’s “economic development financing program” • Loans are provided to expanding small businesses to aid in job creation • SBA loans are guaranteed by the Federal • Government
Selling the 504 Option • If the answer to any of the following questions is yes, then give the customer an introduction to SBA 504. • Is working capital important to the success of the business? • Is a long term fixed rate important for cash flow? • Is a low down payment important? • Does the business want protection in the event of a devaluation of real estate?
Benefits to the Borrower • Financing for a fixed asset project with only 10% injection. • Long-term, fixed rate funds…enhancing cash flow for business. • SEED’s effective rate as of August 2012 is: - 4.37% on a 20-year debenture - 3.20% on a 10-year debenture • Ability to include soft costs, equipment and furniture and fixtures in a real estate project…enabling businesses to minimize out of pocket expenses and preserve cash. • Lower down payment conserves working capital.
Benefits to the Bank • Bank’s maximum loan-to-value is typically 50%, minimizing risk and improving liquidity. • Ability to provide 90% financing to a small business client. • Program allows reliance on financial projections – for startups and businesses with inadequate historic cash flow. • The bank’s first mortgage can be sold in the secondary market for a premium. • The CDC is responsible for all of the paperwork!!
Other Considerations • There is a prepayment penalty for the first half of the term of the debenture. • The debenture is assumable by another borrower. • The fees on the 504 loan currently total 2.65%; however, they are financed with the 504 loan. • The SEED minimum project size is $200,000. • SEED’s 504 loans range from $80,000 to $5.0 million for standard industries and up to $5.5 million for manufacturers. • SEED’s other loan programs can be used in conjunction with 504 projects, or can replace the SBA 504 portion on small projects.
Structure of a Typical $1 Million Project Loan % of EntityAmountProjectSecurity Lender $500,000 50% 1st Mortgage SEED/SBA $400,000 40% 2nd Mortgage Borrower $100,000 10%* TOTAL: $1,000,000 100% Total Debenture: $411,000 (rounded up) (Up front fees include 2.65% on $400,000) * Projects that involve a new business and/or special purpose building will require an additional 5-10% from the borrower.
Fees Charged by CDC Financed as part of 504 loan – 2.65% of net debenture CDC Processing Fee: 1.50% SBA Guarantee Fee: 0.50%Paid to SBA- one time fee Underwriting Fee: 0.40% Covers expense of pooling & underwriting 504 debenture, paid directly to Merrill Lynch Funding Fee: 0.25% Paid to Central Servicing Agent (Colson Services) Total: 2.65%
Effective Rate Rate the borrower actually pays Note rate (as of 7/12 Sale) 2.411% Plus Fees: Annual Central Servicing Agent Fee 0.100% CDC Servicing Fee (SEED .800 + SBA .125) 0.925% SBA Fee 0.938% Total Fees 1.963% SEED’s Effective Rate (As of 7/12) 4.374% SBA Required Servicing Fee – This fee can go up to 1.5%. CDC’s Servicing Fees vary and impact the client’s effective rate!
Legal Fees Closing costs are financed into the gross debenture & paid to CDC’s closing attorney • Legal Fee – Maximum of $2,500 • Other Eligible Closing Costs: • Title Insurance • Recording fees • Flood Insurance • Filing fees and title searches • Surveys
What’s needed for SEED to approve a 504 request? • Purchase & sales agreement for project property and cost parameters for construction/renovation projects. • Three years of tax returns and/or financial statements for the business. • Information on the borrower’s existing debt. • Personal financial statement and two years of personal tax returns for each principal of the business (20% or more ownership). • Property appraisal and environmental assessment can be submitted to SEED after approval. NO APPLICATION FORM IS REQUIRED!!! WE USE ESSENTIALLY THE SAME UNDERWRITING DOCUMENTATION AS THE BANK!!!
The 504 “Process” • Borrower or the bank submits a loan package to SEED. • The loan request is presented to SEED’s Loan Review Committee (meeting or email). • A SEED commitment letter is sent to the borrower and bank. • Loan is packaged and forwarded to SBA for issuance of the SBA Authorization (3 day turn around). • Bank closes on permanent loan and the bridge loan. SEED closes simultaneously on turnkey projects. • SEED/SBA payoff the bank’s bridge loan in 90 days on turnkey projects or after the project is completed (construction & renovation projects).
Use of Funds Fixed-Asset Acquisition or Expansion Including: • Purchase land & construction of new buildings • Purchase and/or renovate existing buildings • Acquire/Install machinery & equipment • Refinance existing fixed asset debt up to 50% of new SBA 504 Project • Soft costs related to the project (appraisal, environmental, interim interest, other) Ineligible uses of funds: • Purchase of trucks and autos • Working Capital • Franchise fees
Use of Funds (Cont.) Temporary Debt Refinancing Under Small BusinessJobs Act of 2010: • All loans must be approved by 9/27/12. • Commercial mortgages or balloon payments. • All loans must be funded within 6 months of approval. • There will be an SBA fee of 1.103%, instead of .938% to • calculate Effective Interest Rate. • At least 85% of loan was used for 504 eligible purposes. • New rules released 10/11/11. Contact CDC.
Use of Funds (Cont.) Temporary Debt Refinancing Under Small BusinessJobs Act of 2010: • Up to 90% of current appraised value or 100% of outstanding mortgage (whichever is lower). • Loans must be current for the past year (transcript required for same institution debt). • Debt must have been incurred not less than 2 years prior to date of application. • An independent appraisal dated within 6 months of the date of application is required.
Use of Funds (Cont.) Temporary Debt Refinancing Under Small BusinessJobs Act of 2010: • An environmental report dated within one year is required. • Existing SBA 504 and government guaranteed loans (SBA 7A, USDA, etc.) are not eligible. • SBA 504 loan size may not exceed the number of employees times $65,000, if job creation/retention or policy goals are not met. • Eligible refinancing costs and some business expenses can be included.
Bank’s Permanent First Mortgage • Permanent financing must be for at least 10 years – (on a 20-year debenture) with no balloon payments during that time. • Interest rate on the bank’s mortgage is set by bank. • Bank can charge points. • One-time fee of 0.5% on the bank’s first mortgage portion is currently being paid by SEED Corporation (up to $34, 375 on a $13.75 million project).
Occupancy Requirements • Existing Building: Business must occupy at least 51% - may lease out up to 49% • Newly Constructed Building: Business must initially occupy at least 60% - must occupy up to 80% within 10 years - can sublease 20% indefinitely
Job Requirements Create/Retain one job for each $65,000 borrowed through the 504 Program unless the project meets a Public Policy Goal. Public Policy Goals: • Rural Development • Expansion of Minority, Women or Veteran-Owned Businesses (51% + owned) • Expansion of Exports • Business District Revitalization • Enhanced Economic Competition • Restructuring Due to Federally Mandated Standards and/or Policies • Changes Necessitated by Federal Budget Cutbacks • Manufacturing businesses – one job per $100,000 • Energy-consumption reduction of at least 10% or sustainable design or equipment and process upgrades
Why YOU Should Consider a SEED/SBA 504 Loan • Up to 90% financing for project • Lower down payment for client; improved liquidity for bank • SEED pays the .5% bank fee • SEED provides quick & efficient turn around (SBA approved for the Abridged Submission Method) • Note is assumable by another borrower • SEED offers a low 504 rate; provides loans up to $200,000 at 5% fixed to assist with working capital or replace the down payment • SEED is responsible for all the paperwork; No application form to fill out www.seedcorp.com