Understanding SBA 504 Loans
Purpose of the Program
The US Small Business Administration 504 Program is designed to provide financing for the purchase of fixed assets at a fixed rate throughout the entire life of the loan. Operating as a Certified Development Company (CDC), Ocean State Business Development is a nonprofit corporation established to contribute to the economic development of local communities in Rhode Island, Massachusetts, and Connecticut.
Why it is Beneficial
- Long-term fixed rate financing at below market rates (typically below the Bank rate).
- Customer can obtain up to 90% financing
- the Bank, Credit Union, or Financial Institution receive an enhanced loan-to-value (LTV); which may expedite the approval/ closing process
The 504 programs gives the borrower the advantage of having a fixed rate for the entire life of the loan (10/20/25 years). This hedges the borrower from any interest rate volatility associated with a typical, shorter term, conventional bank loan; which contains adjustable rates or “balloon” payments. The stable interest rates provide one less variable for business owners as they project future cash flows.
The 504 program gives business owners peace of mind, so that they can plan their future cash flows!
Our team will guide you through the process from application to closing. We here at OSBDA pride ourselves in customer service and emphasize communication with Banks, and most importantly our Borrowers. We understand that a business owner’s most important commodity is their time. Our lenders will work with you to ensure satisfaction throughout the entire process.
Typical financing structure on a $1,000,000 project:
|% of Project||Collateral|
|OSBDA/ SBA||$400,000||40%||Second Position|
Minimum equity requirements*:
|Business is less than 2 years old||15%|
|If Real estate is considered “special use”||15%|
|If both startup and special use||20%|
Required of all those who own 20% or more of the operating company/ real estate entity
Term of Fixed Financing:
20/25 years: Real estate
10 years: Equipment (that has a useful life of > 10 years)