CDFA Spotlight: SBA 504 & 7(a) Loan Programs

Small businesses continue to play an important role in the economy. Today, small businesses make up 99.7 percent of all firms, employ half of all private sector employees, generate 60 to 80 percent of all new jobs annually over the last decade and employ 45 percent of total U.S. private payroll. The footprint small businesses have on the economy is great, however they face several challenges. One of these challenges is access to financing. (Source: U.S. Small Business Administration, http://app1.sba.gov/faqs/faqindex.cfm?areaID=24, Accessed January 25, 2007.)

The U.S. Small Business Administration (SBA) has recognized the important economic role small businesses play and has established various support tools. Some of these tools include financing options such as the SBA 504 and 7(a) programs.

The information used to compile this fact sheet is available from the SBA. You can visit their Web site at http://www.sba.gov.

U.S. Small Business Administration (SBA)

The U.S. Small Business Administration (SBA) was established in 1953 as an independent agency of the federal government. The SBA’s mission is to aid, counsel, assist and protect small business concerns, preserve free competitive enterprise, and maintain and strengthen the nation’s economy.

The main focus of the SBA is to help Americans start, build and grow businesses. It supports efforts at local, regional and national levels to promote a healthy economy; build America’s future; and compete in today’s global marketplace.

Through two main loan programs designed to assist small businesses—the CDC/504 program and the basic 7(a) Loan Program, the SBA provides small business owners access to financing that might not be available through conventional channels. Historically, these programs have been vastly underutilized.

Certified Development Company (CDC) / 504 Loan Program

The SBA 504 Loan Program provides access to funding for the purchase of fixed assets—land, building, machinery, etc. Financing for a 504 loan is made through a Certified Development Company, which is a non-profit corporation designed to promote economic development in its community. CDC’s work in partnership with the SBA and private sector lenders to provide financing to small businesses.

The 504 loan is a co-lending product between a private sector lender and a CDC. A 504 loan has three funding sources. Generally, a bank contributes up to 50 percent of the project financing, a CDC supplies up to 40 percent and the small business being assisted contributes at least 10 percent. The bank and the CDC each make a separate loan to the qualifying small business.

The CDC’s loan is backed by a 100 percent SBA guaranteed debenture. The maximum SBA debenture is $1,500,000 if job creation criteria are met. Generally, one job needs to be created or retained for every $50,000 in SBA funding. An exception is made for small manufacturers, which must create or retain a job for every $100,000 in SBA funding received. If a public policy goal is being set, a maximum SBA debenture is $2,000,000. A public policy goal include the following areas: business district revitalization, expansion of exports, expansion of minority business development, rural development, increasing productivity and competitiveness, restructuring because of federally mandated standards or policies, changes necessitated by federal budget cutbacks, or expansion of small business concerns owned and controlled by veterans.

What are public policy goals?

• Business district revitalization
• Expansion of exports
• Expansion of minority business development
• Rural development
• Increasing productivity and competitiveness
• Restructuring to meet mandated standards and policies
• Changes due to federal budget cuts
• Expansion of business, owned and controlled by veterans and women

	$ Amount	% Of Project	Security
Bank Loan	$500,000	50%	1st Lien
SBA /CDC Loan	$400,000	40%	2nd Lien
Borrower	$100,000	10%
Total	$1,000,000	100%

• Low down payment
• Below market, fixed interest rates
• Long-term financing
• Loan fees may be financed
• Loan is assumable

• Land acquisitions and improvements (including existing buildings, grading, street improvements, utilities, parking lots and landscaping)
• Construction of new facilities
• Purchasing, modernizing, renovating or converting existing facilities
• Purchasing of long-term machinery and equipment (useful life of at least 10 years)
• Payment of interest/fees on interim financing
• Payment of soft cost related to the project (such as professional fees)

• Working capital
• Inventory
• Consolidating or repaying debt or refinancing

• For-profit firms only
• Net worth of less than $7 million
• Two-year average net profit, after taxes of less than $2.5 million

• If the loan is for a facility the business applicant must be the primary user of the facility (minimum 51% for existing facilities and 60% for new construction)
• Job creation criteria: 1 job for each $50,000 in SBA financing provided
• Small manufacturers have a job retention or creation for each $100,000 in SBA financing
• If the business meets other public policy goals the requirements may not apply

• Traditional lending institution provides first lien loan – covering up to 50% of the project cost. (It has its own rate–generally market rate, terms and conditions for a minimum 10-year term)
• CDC financing for up to 40% of the project cost provides the second lien loan. (Below market fixed interest rate, terms as long as 20 years for real estate and ten years for machinery)
• 10 percent of total project cost comes from the borrower, but maybe as much as 20 percent if a new business or facility for special usage. (Down payment can be cash, equity in land or building, existing equipment or any other fixed assets that are part of the project)

• Most upfront fees associated with the 504 loans are included in the loan
• Processing fees total approximately 2.75%
• Fees add to the borrower’s overall cost, but result in lower interest rates than normally attainable through conventional lending
• Interest rates are based on an increment above the current market rate for five-year and ten-year U.S. Treasury issues
• Maturities of 10 and 20 years are available

• Demonstrate repayment ability with cash flow
• Good character
• Management capability
• Adequate collateral
• Owner’s equity contribution
• Owners of 20% or more required to personally guarantee SBA loans

• Meet SBA size standards
• Operate a for-profit business
• Engaged in or proposed to do business in the U.S.
• Possess reasonable owner equity to invest

• Buy machinery and equipment
• Business expansion
• Purchase existing business
• Augment working capital
• Refinance debt and balloon payments
• Start a franchise
• Make leasehold improvements
• Remodel or renovate
• Increase your inventory
• Purchase owner-occupied commercial real estate
• Start a new business
• For short-term working capital needs (including seasonal financing, contract performance, construction financing, export production and/or financing against existing inventory)

• Maximum loan amount set by Congress - $2 million
• SBA’s maximum exposure is $1.5 million
• Maximum guarantee for a lender is 75%
• SBA Express loans have a maximum guarantee set at 50%

• Ability to repay
• Purpose of loan proceeds
• Useful life of the assets financed
• Maximum loan amounts for real estate and equipment is 25 years
• Maximum loan amounts for working capital is 7 years

• Negotiated between borrower and lender, subject to SBA maximums
• Rates may be fixed or variable

• Loans of $150,000 or less – 85%
• Loans above $150,000 – 75%
• SBA Express loans carry a maximum guarantee of 50%

• To offset costs to taxpayers, the lender is charged a guarantee fee and servicing fee for each loan approved and disbursed
• Fee amounts are based on the guarantee portion of the loan
• Borrower charged an upfront guarantee fee after lender pays SBA fee
• Lender’s annual service fee to SBA can’t be charged to borrower
• Loans of $150,000 or less, a 2% guarantee fee
• Loans of $150,000 up to and including $700,000, a 3% guarantee fee
• Loans greater than $700,000, a 3.5% guarantee fee

• First year after disbursement, 5% of the amount of prepayment
• Second year after disbursement, 3% of the amount of prepayment
• Third year after disbursement, 1% of the amount of prepayment

Issue	SBA Express	SBA Community Express
Maximum Loan Amount	$350,000	$250,000
Maximum SBA Guaranty %	50%	Follows Standard SBA Guaranty Percent
Interest Rate	Lenders and borrowers can negotiate the interest rate. Rates are tied to the prime rate (as published in the Wall Street Journal) and may be fixed or variable, but they may not exceed SBA maximums: Lenders may charge up to 6.5 percent over prime rate for loans of $50,000 or less and up to 4.5 percent over the prime rate for loans over $50,000	Community Express loans are subject to the same maximum interest rate as all SBA loans
Eligibility Decision	By SBA, Qualified Lenders May be granted Authorization to make eligibility determinations	By SBA
Revolving Lines of Credit	SBA Express allows revolving loans up to 7 years with maturity extensions permitted at the outset	Allows revolving loans up to 7 years
Turnaround Time	Within 36 Hours	Mostly Within 36 Hours
Forms	Lender Uses Mostly Own Forms and Procedures	Lender Uses Mostly Own Forms and Procedures
Collateral	Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans over $25,000 up to $150,000.	Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans over $25,000 up to $150,000.
	For Loans greater than $150,000, follows SBA's general collateral policy	For Loans greater than $150,000, follows SBA's general collateral policy
Credit Decision	By Lender	By Lender
Purchase	May request expedited SBA purchase on small loans or in situations where liquidation may be delayed.
Technical Assistance		Arranged or Provided by Lender