Frequently Asked Questions – SBA 504 Loan Program
Q.What is the purpose of the SBA 504 Loan Program and why does it exist?
A. The SBA 504 Loan Program provides economic development financing that is designed to encourage private sector investment in fixed assets, the results of which increases productivity and creates new jobs. The local tax base is also improved by way of adding assets on which taxes are based. The program provides long-term, low down payment, reasonably priced fixed-rate financing to healthy and expanding businesses that have the probability of creating new jobs.
Q.What is a Certified Development Company (CDC)?
A. A Certified Development Company (CDC) is a community-based company approved (certified) by SBA to promote economic growth within its area of operations.
Q.What is the role of the Certified Development Company (CDC)?
A. The role of a Certified Development Company (CDC) is to:
- Stimulate the growth and expansion of small businesses primarily through financial assistance; and
- Offer the SBA 504 Loan Program to eligible small businesses through a full-time professional staff.
Q.Who benefits from the SBA 504 Loan Program?
A. The SBA 504 Loan Program benefits:
- The local economy through job creation.
- Small expanding businesses by reducing equity requirements and providing high leverage financing over long terms.
- Local government through an increase in the tax base.
SOURCE OF PROGRAM FUNDING
Q.Where do the loan funds come from?
A. The SBA 504 Loan Program is funded through the sale of Certified Development Company (CDC) debentures that are fully guaranteed by SBA. Private investors that are looking for fixed income streams guaranteed by the Fed find this investment attractive. Examples of private investors include pension funds, life insurance companies, large banks, and individuals under certain circumstances. The source of program funding is entirely private. The Federal Government is a guarantor only. Program fees charged to the Program’s participants reimburse the Federal Government for the subsidy expense associated with the guaranty. Bank and non-bank first mortgage lenders, Certified Development Companies, and the borrowers are the source of Federal subsidy reimbursement. This is a no cost program to the Federal Government.
Q. Why is the source of the loan funds important to the program’s existence?
A. The source of loan funds under the SBA 504 Loan Program is important to the Program’s existence. Most programs requiring continuing Federal subsidy do not enjoy longevity and suffer budgetary risks. The SBA 504 program is not such a program. Given that the source of funding for the program is private and that any Federal subsidy expense is reimbursed by the program participants, there has been little difficulty in raising support in Congress for this well accomplished economic development program.
Q.Should I be concerned about the availability of loan funds for my project?
A. No, you should not be concerned about the availability of loan funds under this Program. The SBA 504 Loan Program is funded through the sale of debentures to private investors. The debentures are guaranteed with the full faith and credit of the U.S. Government. Governmental guarantees for the 504 debentures are currently under a continuing Congressional resolution. The Federal subsidy for the Guaranty is underwritten and funded by fees charged to the Program’s participants rather than the Fed. Funding for the program is abundantly available with no risk to the Federal Government. Investors find these securities attractive in light of the federally guaranteed rate of return that is competitive among-fixed yield investments.
Q.What role does SBA play in accessing the loan funds?
A. SBA’s role in accessing funds under the 504 Loan Program is to guarantee the debentures being sold to private investors. Private investors find comfort in knowing that the yield from their investment is guaranteed by the Fed.
Q. What role does NEPA BFC play in accessing the loan funds?
A. NEPA BFC’s role in accessing funds under the 504 Loan Program is to issue the debenture that is guaranteed by SBA. Each month, 300 Certified Development Companies from various communities in the United States pool and sell these Federally insured debentures to private investors. The Certified Development Company processes loan applications through the U.S. Small Business Administration. The Certified Development Company also closes and services its loans to various borrowers.
Q. What is the relationship between NEPA BFC and SBA?
A. NEPA BFC is certified by SBA to administer its 504 Loan Program, that provides financing to eligible small businesses
Q. What are the basic eligibility requirements for SBA 504 Loans?
A. To be eligible for a SBA 504 Loan, a small business applicant must:
- Be an operating business.
- Be organized for profit.
- Be located in the United States.
- Have a tangible net worth less than $7.5 million, and have an average net income, after Federal income taxes, of less than $2.5 million for the preceding two years. Industry size parameters also apply.
- Be able to demonstrate a need for the desired credit.
Q. What types of businesses are ineligible for SBA 504 Loans?
A. Ineligible business types include:
- Non-profit businesses.
- Businesses engaged in lending.
- Passive holder of real and or personal property.
- Life insurance companies.
- Businesses located in a foreign country or owned by aliens.
- Businesses selling through a pyramid plan.
- Businesses engaged in gambling.
- Illegal businesses.
- Businesses that restrict patronage.
- Government-owned entities, excluding Native American Tribes.
- Businesses engaged in promoting Religion.
- Businesses engaged in loan packaging.
- Businesses owned by persons of poor character.
- Equity interest by lender, CDC, or associates in applicant concern.
- Businesses providing prurient sexual material.
- Prior loss to the government.
- Political or lobbying activity.
Q. What can the SBA 504 Loan be used for?
A. A small business must use a SBA 504 Loan for sound business purposes. The use of loan funds is prescribed in each Authorization for Debenture Guaranty. A Borrower may use loan funds from any SBA loan to:
- Acquire land.
- Improve a site.
- Purchase one or more existing buildings.
- Convert, expand or renovate one or more existing buildings.
- Acquire and install machinery and equipment having a useful life of ten years or more. These assets must be at a fixed location.
- Construct real estate.
Although not an eligible use of funds under the 504 Loan Program, some SBA Loan Programs can be used to refinance or restructure existing debt. However, this refinancing must result in at least a 20% reduction in loan payments associated with that portion of the new debt.
Q. Are there restrictions on how SBA 504 Loans can be used?
A. Yes, there are restrictions. Examples include:
- A purpose that does not benefit the small business.
- Investments in real or personal property acquired and held primarily for sale, lease, or investment.
- General refinancing. However, funds can be used to term-out debt obtained in anticipation of the 504 project which would have been eligible for 504 financing otherwise.
- Payments or distributions to Associates of the applicant business.
Q. Are farming enterprises eligible?
A. Yes, farm related businesses are eligible. Federal financial assistance to agriculturally oriented enterprises is generally made by the United States Department of Agriculture (USDA), but may be made by SBA under the terms of a Memorandum of Understanding between SBA and USDA. Farm-related businesses that are not agricultural enterprises are eligible businesses under SBA’s business loan programs. Financial assistance under the 504 Loan Program is only available for facility enhancement such as fencing, diking, construction of silos, barns, hog and dairy facilities, and farm machinery and equipment with the required economic life span. All farm enterprises are subject to the same eligibility rules as other applicants.
NOTE: Agricultural Enterprises include businesses engaged in the cultivation of soil, produce of crops, and live stock. Farm-Related Businesses are those that supply goods and services primarily used in connection with farming.
Q. Does SBA give special consideration to Veterans?
A. Yes. SBA will give special consideration to a small business owned by a Veteran or, if the Veteran chooses not to apply, to a business owned or controlled by one of the Veteran’s dependents. If the Veteran is deceased or permanently disabled, SBA will give special consideration to one survivor or dependent. SBA will process the application of a small business owned or controlled by a Veteran or dependent promptly, resolve close questions in the applicant’s favor, and pay particular attention to maximum loan maturity. For SBA loans, a Veteran is a person honorably discharged from active military service.
Q. What are SBA’s lending criteria?
A. The applicant, including an Operating Company, must be creditworthy. Loans must be sound as to reasonably assure repayment. SBA will consider:
- Character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its Associates, and guarantors.
- Experience and depth of management.
- Market demand for the borrower’s product or service.
- Past earnings, projected cash flow, and future prospects.
- Ability to repay the loan with earnings from the business.
- Sufficiency of invested equity to operate the business on a sound financial basis.
- Potential for long-term success.
- Nature and value of collateral (although collateral will not be the sole reason for denial of a loan request).
- The effect any affiliates may have on the small business applicant.
Q. What is NEPA BFC’s service area for the SBA 504 Loan Program?
A. NEPA BFC is certified through SBA to administer the 504 Loan Program in Pennsylvania.
FEES AND VARIOUS OTHER DISCLOSURES
Q. Are there any origination fees associated with the SBA 504 Loan Program?
A. Yes, there is an origination fee on a SBA 504 Loan. The origination fee is equal to 1.50% of the net Debenture amount that is in most cases 40% of the total project cost. The fees are included in the loan you receive and cannot be paid out of pocket.
Q. What are debenture soft costs?
A. Debenture soft costs are fees associated with the SBA 504 loan. These costs include the origination fee of 1.50%; the funding fee of ¼ of 1% and the underwriter’s fee of 1/2 of 1%. These fees are financed into the project and paid from the loan proceeds at the time the loan is funded.
Q. What are miscellaneous billings?
A. Miscellaneous billings are charges against the application deposit account. These billings reimburse NEPA BFC for expenses incurred during the course of its activities.
Q. What is the interest rate under the SBA 504 Loan Program?
A. The interest rate under the SBA 504 Loan Program is set at the time the Debenture is sold to the private investor. The interest rate is typically tied to the ten-year Treasury bond rate. The spread over the Treasury bond rate is roughly 2%.
Q. Is there a pre-payment penalty under the SBA 504 Loan Program?
A. Yes, there is a pre-payment penalty during the first half of the term on a SBA 504 Loan. The penalty begins at the note rate and decreases by 1/10 each year until it is zero at the end of the tenth year.
Q. What is the Application Deposit Agreement?
A. The Application Deposit Agreement is an agreement between NEPA BFC and the applicant. This Agreement requires a $2,500 deposit to be used to pay for costs incurred by NEPA BFC during the application and closing process. If the application is not approved, the deposit is refunded to the applicant net of expenses to that point. If the application is approved by both NEPA BFC and SBA but the applicant elects to withdraw the application, then the deposit is non-refundable. Once the application has been approved, NEPA BFC will use this deposit to cover direct costs such as legal fees, Federal Express charges, credit reports, title and recording costs, copies, etc. Any funds remaining after closing will be returned to the applicant with a settlement statement identifying how funds were used.
THE APPLICATION & CHECKLIST
Q. Why do I apply for a SBA 504 Loan with NEPA BFC rather than SBA?
A. Under the SBA 504 Loan Program, all applicants must apply through a Certified Development Company (CDC). The CDC prepares the application and works with SBA through the application and closing process. Once the loan is closed, the CDC services the loan throughout its term, ensuring that the applicant complies with all provisions outlined in SBA’s Authorization.
Q. What are the requirements for applying for a SBA 504 Loan through NEPA BFC?
A. The requirements for applying for a SBA 504 loan through NEPA BFC (NEPA BFC) are noted below:
- Furnish NEPA BFC with all of the items identified on the Application Checklist.
- Return the Application Deposit Agreement with the Application Deposit of $2,500.
Q. How can I get a copy of the Application and Checklist?
A.The Application Checklist and related forms can be obtained by requesting them by mail at 1151 Oak Street, Pittston, PA 18640; by phone at (570) 655-3634 or by going to the Application Packet download page.
Q. How do I obtain the forms referenced on the Checklist?
A. Forms referenced on the Application Checklist are provided with the checklist itself. Request the Checklist. The forms come with it.
Q. If I have questions, who do I speak with and how do I contact them?
A. If you have questions while working through the Application Checklist, you can either call the NEPA BFC office at (570) 655-3634, or you can e-mail your questions through the Internet Home Page at NEPA BFC.org.
THE APPROVAL PROCESS
Q. How long before I know whether or not I have met all of the application requirements?
A. Within three business days of submission, you will be advised whether or not your application has been accepted for processing. If your application is incomplete, a description of the deficiencies will be sent to you by letter.
Q. How long before I know if my loan is approved or not?
A. Once your application has been accepted for processing, your request will be processed and forwarded to NEPA BFC’s Loan Committee and SBA within ten business days. Typically, SBA will reach a decision within five business days of receiving your application from NEPA BFC.
Q. How will I be informed whether or not SBA has approved my application?
A. Once NEPA BFC has received SBA’s decision, you will be notified by phone.
Q. If approved, what happens next?
A. If SBA approves your request, they will issue an Authorization outlining the terms and conditions of their approval. The Authorization is issued to NEPA BFC. Once NEPA BFC receives the Authorization, NEPA BFC will schedule a pre-closing conference that will be held at NEPA BFC’s offices. The Applicant and participating lender will attend the meeting. During the meeting, the Authorization will be reviewed and signed by the Applicant. NEPA BFC will then return the executed Authorization to the SBA. The Authorization must be returned to SBA within ten business days of issue. Closing requirements and time lines are discussed during the pre-closing conference.
Q. What if I disagree with the SBA or NEPA BFC credit decision?
A. If you disagree with the decision of either NEPA BFC or SBA, you may appeal by letter to NEPA BFC. NEPA BFC will then present your appeal to the appropriate approval body and will notify you of the outcome by letter. You may also appeal to the SBA directly.
THE CLOSING PROCESS
Q. What is the closing process for a SBA 504 Loan?
A. The closing process for a SBA 504 Loan is as follows:
Typically, 45 days will expire from the time that NEPA BFC receives all of the closing checklist items to the sale of the 504 debenture and funding of the 504 loan.
THE FUNDING PROCESS
Q. Is anything required of me during the funding process?
A. Nothing is required of you during the funding process. Once the loan is closed, documents are forwarded to SBA. The rest happens automatically with no involvement from you or the interim lender.
Q. What actually happens?
A. After your closing documents have been approved by SBA’s legal division, SBA schedules your loan for the debenture sale. Once priced and sold, the funds are wired to the participating lender to pay-down its interim loan. At this point, the funding of the loan is complete.