A business is eligible for 504 funding when it:
- Is organized as a for-profit legal entity (corporation, partnership, sole proprietor, limited liability company);
- Operates as a manufacturing, wholesale, service, professional service or retail concern;
- Is located or planning to locate in the United States; and
- Does not have net worth in excess of $15 million and does not have an average income, after federal income taxes, for the preceding two years in excess of $5 million.
- Eligible businesses must have a commitment from a third party lender (hereafter "lender") to provide an interim loan and a term loan for the project. Lender financing is generally 50% of the fixed asset costs of the project, and the term of
the lender's loan must be at least ten (10) years for a real estate project and at least seven (7) years for an equipment project. The lender receives a senior position (first lien) on collateral. There is a one time up-front participation fee assessed that is calculated as 1/2% of the lender's loan. This fee is paid at closing.
The 504 portion of the project is generally 40% of the fixed asset cost. The maximum 504 loan amount is $5 million. Additionally, small manufacturers (certain NAICS codes) and projects addressing energy conservation can obtain a 504 loan up to a maximum of $5,500,000. Projects must be at least 51% owner-occupied for purchase transactions - 60% for new construction.
An existing small business (more than two years old) must provide at least 10% of the fixed asset project cost. In cases where the loan is to a new business (less than two years old) or is for a special purpose building, the business must provide at least 15% toward the project costs. In cases where the loan is to a new business and also for a special purpose building, the business must provide at least 20% or more toward the project cost.
The 504 loan has a significant impact on the economic growth of the community. This is demonstrated either through job creation or retention ($65,000 per job for each 504
dollar spent) or by addressing SBA public policy and community development goals.
The interest rate for a 504 loan is fixed for the term of the loan and is usually better than the rate a small business could obtain from a bank. Included in the interest rate are monthly servicing/guaranty fees paid by the borrower in addition to monthly principal and interest payments.
These fees are determined by federal statute. Funds for the 504 loan are obtained by selling debentures on Wall Street to investors. The 504 loan is not closed until the project is complete. When the 504 loan is closed, and the debentures are sold, the interest rate is determined. The term of the 504 loan is either ten (10) years for equipment, or twenty (20) years for real estate.
There is a prepayment penalty for half of the term of the 504 loan. The prepayment penalty is based on a declining percentage of the debenture interest rate applied to the outstanding balance.
The minimum fixed asset project size is typically no smaller than $150,000.
There are statutory origination fees associated with the loan closing. These fees, approximately 2.75 percent of the 504 portion of the financing and a fixed legal closing fee not to exceed $2,500, are added to the proceeds amount and funded through the loan.
An application fee must be submitted with the CVC 504 loan application to process the request.
