|
The SBA 504 Loan Program offers subordinated, fixed rate financing to
healthy and expanding small businesses. Long-term, fixed rate financing
(10-20years) and reasonable rates (near long-term US Treasury bond
rates), make the 504 Program an attractive and effective economic
development financing tool.
Type of Financing: The 504 Program is available for fixed asset
purchases only: land, building, and equipment with a useful life of 10
years or more. No working capital, inventory, venture capital or
refinancing are eligible.
SBA 504 financing is “permanent” take-out mortgage financing. Interim or
construction financing must be utilized to complete the project.
Eligible businesses: Eligible borrowers are user, for-profit businesses.
Ineligible businesses include not-for-profit, passive investment and
real estate companies, financial institutions, developer/landlord
arrangement, ventures, private recreation facilities and unregulated
media firms.
Structure: Typically the 504 loan has a 50-40-10 structure where 50% of
the project is financed by a regulated lender which received a first
mortgage position on all project collateral. 40% is provided by the
South Dakota Development Corporation (SDDC) which sells debentures
guaranteed by SBA and receives a subordinated collateral position. The
remaining 10% is provided by the borrower in a cash equity injection.
This is the minimum equity contribution and depending on the project,
and available personal resources, the SDDC may require a larger
contribution.
Regulated Lender: At least 50% of the project costs must be provided
from “non-federal” sources, such as commercial banks, S&Ls, saving
banks, insurance companies and equity contributions. The lender will
receive a first position on the assets acquired with the loan proceeds.
The maturity if this loan must be at least 7-10 years depending on the
amortization of the SBA loan, and have an interest rate which is “legal
and reasonable,” fixed or variable and may be renegotiable. The
renegotiation formula must be state in advance.
The SDDC sells debentures guaranteed by SBA, with a 10 or 20 year
maturity based upon the weighted average of the useful life of the
assets purchases with the loan proceeds. The rate f interest is fixed
for the term of the loan and determined at the time of sale of the
debenture, which is based on the current average market yield.
There are various one-time fees associated with the 504 loans. The
one-time processing fees total approximately 3.25% and are added to the
loan amount. Servicing fees are added to the interest rate: Central
Servicing Agent receives 0.0625%, the SDDC receives 0.5% per year on the
outstanding balance, and the SBA receives 0.00125% per year on the
outstanding balance determined at 5-year anniversary intervals, at the
beginning of such interval.
Equity Injection: The borrower generally provides at least 10 percent of
the project cost in the form of a cash equity injection.
|
Project Costs: |
|
Conventional loan; first mortgage |
|
|
Acquire land & building |
$300,000 |
10 yr. term, mkt. rate of int.
|
$325,000 (50%) |
|
Renovate building |
50,000 |
SDDC; second mortgage |
|
|
Acquire equipment |
300,000 |
20 yr. term, debebture rate plus
servicing fee |
260,000 (40%) |
|
Total Project Cost |
$650,000 |
Small Business concern down payment |
65,000 (10%)
|
| |
|
|
$650,000 (100%) |
For more information, or to apply, please contact the Governor’s Office
of Economic Development (GOED) and ask for a loan officer.
|
