SBA 504 Loans: Terms, Conditions, and Fees

Today’s SBA Loan video outlines the basics of the terms, conditions and fees of the SBA 504 program. See the full transcript below the video.

As with any financing, there are various SBA 504 loan terms, conditions and fees to be aware of. Let’s walk through these as they relate to the SBA 504 loan program. First, we’ll discuss the bank loans: Amortization / Balloon. The term of the bank’s construction line will vary but, in general, the bank will make the construction line for as long as is needed to complete the project (for a building project, this is typically 6-12 months). It is advisable to request a construction line term for slightly longer than the estimated construction time to allow extra time for delays and for gathering the necessary items to close on the CDC loan. The term for the permanent bank loan is required to be at least 10 years but the bank is permitted to reset the rate during the term of the loan. When the rate resets, it will usually adjust to some pre-determined index plus a spread (for example, the bank may elect to commit to the loan for 10 years but have the rate adjust every year to Prime + 1.00). At the end of the 10 year term, bank loans will need to be renewed. In regard to amortization period, while this too varies among banks, most will prefer a 20 year schedule for real estate but are willing to go up to 25 or 30 years. Commonly, a total project may include both real estate and machinery and equipment. In this case, a weighted average is typically applied to the value of the collateral and the amortization period is set accordingly. Interest Rate. The SBA 504 loan rates on the bank construction line are negotiable but small business loan rates are typically a variable rate tied to the Prime rate index. (The business loan interest rates on the permanent bank term loan are also negotiable, with options as previously discussed.) Fees. As with the SBA 504 interest rates, the bank is not limited in their ability to charge origination or other types of SBA 504 loan fees on the construction line or permanent term loan. This too is negotiable. If loan fees are charged by the bank, they can be included as project costs to be financed. Other Closing Costs. On the bank side, the borrower will generally be responsible for all other direct costs the bank incurs in putting the loan together (appraisal, recording and documentation fees, etc.). These “soft” costs can also be included in the total project costs to be financed. Personal Guaranty. The bank is under no requirement to obtain personal guarantees from the owner or owners of the business but will commonly require them for new small business loans through the SBA. As we’ll see in reviewing the requirements for the SBA guaranteed CDC loan, personal guarantees for the CDC loan are required for any 20% or more owner of the business. In addition to what we’ve discussed, the bank may also require other SBA loan terms and conditions, such as loan covenants or pre-payment penalties, and they’re generally free to underwrite the 504 loan as they see fit.