Frequently Asked Questions
 

1. What businesses are eligible for SBA 504 loans?
2. How does the SBA 504 loan program work?
3. What types of projects are eligible?
4. What things can't be financed through the SBA 504 Program?
5. What is the maximum loan amount?
6. What is the minimum loan amount?
7. What will the term and interest rate be on the 504 loan?
8. What fees are involved?
9. Are there any pre-payment penalties?
10. What type of collateral is expected to be pledged?
11. What does the SBA look for in a loan applicant?
12. What government paperwork or forms will eventually be needed?
13. Are there special provisions for new businesses?
14. What is the definition of the "special purpose" building?

Dakota Business Finance, through the U.S. Small business Administration (SBA), can provide financing for a wide range of businesses.  To be eligible, the businesses generally must be operated for-profit and fall within the size standards set by the SBA.  Under the 504 program, a business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million, after taxes, for the preceding two years. Businesses may also qualify under alternative size standards.  Contact Dakota Business Finance if size is a concern and we can help walk through this with the bank or borrower. Loans cannot be made to businesses engaged in speculation or investment.

The 504 program is designed to enable small businesses to create and retain jobs.  Typically a 504 project includes the following:

• A loan secured with a senior lien from a private-sector lender (bank) covering up to 50 percent of the project cost,
• A second loan with a junior lien from Dakota Business Finance (certified development company) covering up to 40 percent of the project cost,
• A contribution of at least 10 percent equity by the borrower.  New or Special Purpose projects require more equity from the borrower.

The 504 Loan Program provides fixed rate financing for long-term fixed assets.  Eligible project costs include:

• Purchase of land, including existing buildings, grading, street improvements, utilities, parking lots, and landscaping
• Construct buildings
• Buy or remodel buildings
• Furniture, fixtures and equipment
• Soft costs (architect and engineer fees, appraisal, soils, points, fees, interest)
• Land improvements
• Leasehold Improvements

Project costs that are not associated with long-term fixed assets are not eligible.  Examples include:

• Working capital
• Refinancing
• Debt consolidation
• Accounts receivable financing
• Furniture, fixtures and equipment with a useful life of less than 10 years.
• Inventory
• Construction financing
• Franchising fees

The maximum loan amount for the 504 portion of the loan (up to 40% of the total project) is generally $1.5 million, or in some cases, up to $2 million for "special" projects defined as either rural, woman owned, minority owned, veteran owned, federal cutbacks, export, or modernization projects.  The 504 portion of the loan can be for up to $4 million.  As a general rule of thumb, if the total project is $10,000,000 or less, it may qualify for participation in the 504 loan program.

The smallest debenture that Dakota Business Finance is able to issue is $50,000.  Assuming that this is 40% of the project cost, the smallest total project size that can be financed through the 504 program is about $120,000.

Terms of 10 and 20 years are available.  The 504 debentures are sold on the secondary market and interest rates are set at a fixed rate at the time the loan is funded.  Interest rates are at or below the market rate.

Fees total approximately 3% of the debenture and are financed with the loan.  This fee includes a CDC fee of 1.5%; a guaranty fee; and an underwriting fee. There are no "out-of-pocket" costs for borrower on the CDC portion of the loan.  Dakota Business Finance's fees are built into the 504 debenture and are financed over the 10 or 20 year period.

There is a pre-payment penalty on the 504 loan based on a sliding scale for the first 10 years on a 20 year debenture and the first 5 years on a 10 year debenture.  Terms on the first mortgage are negotiated directly with the lender.

Generally the project assets being financed are used as collateral.  Personal guaranties are required from all principal owners of the business (with ownership of 20% or more and officers).  Liens on personal assets of the principals may also be required.

Generally, SBA is looking for good character, management expertise, and the commitment necessary for success.  Adequate equity investment by the borrower in the business and sufficient funds to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase).  Also, the ability to repay the loan on time from the historical or projected operating cash flow is essential.  A feasible business plan is a must.

Dakota Business Finance will work with borrowers to complete the SBA loan application and other forms that need to be submitted to us and the SBA.  Contact us to set up a meeting to receive technical assistance.

New businesses are defined as those that are less than 2 years old.  The borrower has a mandatory 15% down payment (vs. 10% in a typical 504 program loan).  The CDC (Dakota Business Finance) can only cover 35% of the loan while the bank must stay at 50%.

A "single purpose" building is one that could not be easily adapted for other general purposes without incurring significant expenses.  Examples of single purpose buildings or projects include bowling alleys, marinas, hotels/motels, theaters, convenience stores and gas stations, etc.  In the case where the 504 program is being used to finance a "single purpose" building, the borrower has a mandatory 15% down payment. The CDC (Dakota Business Finance) can only cover 35% of the loan while the bank must stay at 50%.  If the business is both new and for a "single purpose" building, the borrower's contribution must be 20% of the loan (Dakota Business Finance drops to 30% and the bank must stay at 50%).