1 / 37

SBA 504 Loans-An Important Tool for Community Lenders

SBA 504 Loans-An Important Tool for Community Lenders . A vital source of financing for your business customers U.S. Small Business Administration Alabama Lenders Conference April 28-30, 2010. Presenters today…. Bob Dickerson, Foundation Capital

saxon
Download Presentation

SBA 504 Loans-An Important Tool for Community Lenders

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. SBA 504 Loans-An Important Tool for Community Lenders A vital source of financing for your business customers U.S. Small Business Administration Alabama Lenders Conference April 28-30, 2010

  2. Presenters today… • Bob Dickerson, Foundation Capital • Dana Moore, Southern Development Council, Inc. (SDC) • Diane Roehrig, Alabama Community Development Corporation (ALACOM) • Teresa Sands, Greater Mobile Development Corporation • Angie Winter, Alabama Small Business Capital • Q & A Moderator, Dana Moore

  3. Purpose of presentation • What is the 504 Loan Program? • What customers are eligible for 504 financing? • What is the 504 Loan process? • Why would I offer the 504 Loan Program to my customers? • Myth vs. Fact • Question & Answer

  4. 7(a)…the other side SBA Program • Provides financing for businesses through a bank • The SBA guaranty facilitates the extension of credit • Usually utilized for lines of credit and working capital financing • May be used as a companion loan with 504 Loan

  5. What is the 504 Loan Program? • Economic development financing tool • Delivered/administered by CDCs • 504 project has three main partners, generally • 504 project involves fixed asset financing to for-profit businesses

  6. What customers are eligible for 504 financing? • Business customers that are for-profit • Applicant must use the project property - Cannot finance assets for passive income except in the EPC/OC situation. • Located in the United States or its territories • Defined as “small” by SBA definition: - Tangible net worth of $8.5 million or less; and - Average net income after Federal taxes of $3 million or less for the preceding two fiscal years

  7. What customers are eligible for 504 financing? (cont.) • Operating company must occupy 51% of an existing building or 60% of a new building • Demonstrate a need for the 504 Loan by applying the “Credit Elsewhere Test” and “Personal Resource Test” • Meet an economic development objective of the 504 program –job creation/retention.

  8. What customers are eligible for 504 financing? (cont.) • Businesses that currently own land and are ready to construct their building • Now leasing with an option to purchase the property • Currently own their facility and time to remodel, renovate and/or expand • Ready to purchase land and construct a building • Want to move and purchase an existing building • Expanding into new markets and want to add an additional site • Business needing new long-life equipment

  9. How much financing can the 504 Program provide? SBA Loan Maximum 504 Loan amount Standard 504 LoanMaximum $1.5 million Meets 1 of 14 Public Policy Maximum $2 million unless also meets Energy Maximum $4million goals Manufacturer Maximum $4.0 million

  10. What is the 504 Loan process? • Contact the CDC • Structure the financing with the three partners – Third Party Lender, CDC, business applicant - Typical structure 50/40/10 > 50% financing provided by Third party Lender of eligible 504 costs > 40% financing provided by CDC > 10% down payment provided by business applicant

  11. What is the 504 Loan process? (cont) Alternate structure 50/35/15 – required for new businesses or limited or special purpose property • 50% financing provided by Third Party Lender of eligible 504 project costs • 35% financing provided by CDC • 15% down payment provided by business applicant

  12. What is the 504 Loan process? (cont.) • Alternate structure 50/30/20 - requiredfor BOTHnew businesses AND limited or special purpose property - 50% financing provided by Third Party Lender of eligible 504 project costs - 30% financing provided by CDC - 20% down payment provided by business applicant

  13. What is the 504 Loan process?(cont) • Project Example: -Total Project Cost $2,500,00 50% Third Party Lender Loan $1,250,000 40% 504 Loan (net of fees) $1,000,000 10% Borrower down payment $ 250,000 Total Sources of Funds $2,500,000

  14. What is the 504 Loan process?(cont.) • Project Example (cont.) - Calculation of Fee(s) and Savings with ARRA > Third Party Lender Loan $1,2500,000 x .005 = $ 6,250 > CDC Processing Fee $1,000,000 x .015 = $15,000 Total Fee Savings $21,250

  15. What is the 504 Loan process?(cont.) • Third Party Lender Loan - 50% permanent loan > Must be for a term of at least 7 or 10 years, depending on the length of the 504 Loan > Third Party Lender receives 1st lien position on assets financed > Interest rate charged must be legal and reasonable > Must not have any cross-default or cross-collateral feature(s) > Third Party Lender also provides a bridge (interim) loan for the net 504 Loan amount.

  16. What is the 504 Loan process?(cont.) • 504 Loan (CDC loan) - Funded through the sale of a debenture –fully guaranteed by SBA - Either a 10 or 20 year fully amortized note - Subordinate position on assets financed - Fixed interest rate for the full term of the loan - Collateral usually limited to the assets financed - Take-out financing –pays off the bridge (interim) loan provided by the Third Party Lender

  17. What is the 504 Loan process? (cont.) Down payment by business applicant - Borrower must inject at least 10% of the 504 project cost (usually cash) - Alternate down payment: The borrower’s equity in land/building that will be part of the 504 Project. - In some cases, applicant’s down payment may be borrowed.

  18. What is the 504 Loan process?(cont.) • Borrower completes 504 application and submits to the CDC • CDC performs underwriting/credit review • CDC submits application to SBA for approval • Authorization and Debenture Guaranty issued by SBA upon approval.

  19. What is the 504 Loan process?(cont.) • Third Party Lender performs their loan closing and advances both permanent amount and interim loan amount (net 504 Loan) • Upon project completion, CDC performs loan closing for 504 Loan.

  20. What is the 504 Loan process? (cont.) • 504 Loan closing documentation forwarded for legal review • 504 Loan (debenture) is “pooled” with other 504 Loans • Net debenture proceeds (504 Loan) are wired to the Third Party Lender to payoff interim loan.

  21. What is the 504 Loan process? (cont.) • Borrower makes payments on two loans: Third Party Lender loan and 504 loan. • CDC services the 504 loan while the Third Party Lender services their permanent loan.

  22. Why would I offer the 504 Loan Program to my customer(s)? • Advantages for the Third Party Lender - 50% Loan to Value - First lien position on assets being financed - Greater portfolio diversity and credit risk management. - Ability to compete in the market place

  23. Why would I offer the 504 Loan Program to my customer(s)?(cont.) - Improved capital performance measures - CRA Credit - Balance sheet management – 504 projects can be managed so that the take-out financing occurs before the closing of major reporting periods - Pricing and structure requirements can be achieved in advance with an eye toward selling the Third party Lender loan to the secondary market.

  24. Why would I offer the 504 Loan Program to my customer(s)? (cont.) • Advantages to your customer - Low down payment - Low, fixed interest rate - Preservation of borrower’s working capital - Fully amortizing, long term loan(10 or 20 years)

  25. Why would I offer the 504 Loan Program to my customers(s) ? (cont.) - In economic downturn, may be the only option - Interest rate of bank financing my be more favorable due to the Third Party Lender’s low LTV - Can finance closing and other soft costs - Collateral usually limited to assets being financed

  26. Why would I offer the 504 Loan Program to my customer(s)? (cont.) • Advantages to the community - JOBSJOBSJOBS - Capital investment increases tax base - Stimulates other development - Expanded access to capital

  27. What documents are required in a 504 Loan application? • Similar information as provided for the Third Party Lender loan - Historical Financial Statements - Personal Financial Statement(s) - Tax Returns - Business projections - Appraisal - Environmental assessment - Commitment letter from Third Party Lender

  28. New for 504 Loan Program:Debt Refinancing • 504 projects may include a limited amount of debt refinancing. - If the project involves expansion, any amount of the existing debt that does not exceed 50% of the cost of the expansion my be refinanced.

  29. Myth: “SBA loans take way too long.” • Fact: From the time a completed 504 Loan application is received by the CDC and submitted to SBA for approval, the process usually takes three to five working days.

  30. Myth: “SBA loans have too much paperwork.” Fact: Much of the paperwork for a 504 Loan in the same as the paperwork provided to the Third Party Lender. Copies are shared between the Third party Lender and the CDC.

  31. Myth: “SBA loans are last resort financing.” • Fact: The 504 Loan program is designed for expansion of healthy, credit-worthy businesses. However, the 504 Loan Program may also be used for start-up businesses.

  32. Myth: “SBA Loans have too many fees.” • Fact: Fees for the 504 loan are as follows: - *CDC processing fee 1.5% - *Bank Fee .5% (amount of Third Party Lender Loan) - *Currently paid under ARRA Cost to the borrower: $0

  33. Myth: “SBA Loans have too many fees.” • Funding Fee .25% • Underwriting Fee .40% • TOTAL .65% *included in the 504 loan amount • May also add closing costs in the 504 Loan up to $2500 which are amortized over the life of the loan.

  34. Myth: “SBA Loan interest rates are too high.” • Fact: In recent years, 504 Loan interest rates have been at market rate or below. - Note: 504 Loans (40% of the financing package) have fixed interest rates which help provide an excellent blended interest rate with the Third party Lender loan (50 of the financing package).

  35. Myth: “SBA means lots of regulations I have to remember.” • Fact: The borrower and Third Party Lender don’t have to remember all of the rules. Call your CDC expert who knows the details of the 504 Loan Program.

  36. 504 Loans: Let out the well-kept secret! • Winner! Third Party Lender • Winner! Small Business • Winner! Community

  37. Question & Answer • Presenter: Bob Dickerson, Foundation Capital • Presenter: Diane Roehrig, ALACOM • Presenter: Teresa Sands, Greater Mobile • Presenter: Angie Winter, AL Small Business Capital • Q&A Moderator: Dana Moore, SDC

More Related