Taking out an SBA 504 loan is an excellent option when you need funding to purchase a building for your business. Of course, the first thing any borrower wants to know is, “How much can I get?” To answer this question, you need to understand that an SBA 504 loan has three parts—a first loan from a conventional lender, a second loan from the Small Business Administration (SBA), and your own down payment.
Within this structure, your funding potential is practically boundless. We’ll look at a few examples to show how the three elements of your loan interact. First, though, you need to know the basic structure of an SBA 504 loan.
An SBA 504 Loan’s Basic Structure
Let’s take a closer look at the 504. It has three components.
- First, you and your conventional lender agree on financing that suits your needs and meets the lender’s discretion, keeping in mind that the SBA/CDC will be providing funds as well. This is your first mortgage, and its amount, terms and conditions are worked out between you and that lender.
- Then you will receive a second mortgage from the SBA facilitated by a Certified Development Company (CDC), funding up to 40% of the total loan, typically up to $5 million. That loan will have a 10- or 20-year term and a below-market interest rate.
- The final component is the 10% down payment that you provide (hospitality projects and start up companies require a 15% down payment).
Examples of SBA 504 Loan Amounts and Limits
“Running the numbers” shows that when the borrower takes the largest SBA loan for a standard project—$5 million—as 40% of the total, the total project cost comes out to $12.5 million:
Conventional 1st Loan: $6.25 million (50%)
SBA/CDC 2nd Loan: $5 million (40%)
Owner Down Payment: $1.25 million (10%)
Total Project Cost: $12.5 million
However, it is important to note that there is no limit on the bank first mortgage, and therefore no limit to the total project cost. TMC has financed projects over $40 million.
So let’s look at a couple more cases. Say that you are looking to finance $5 million building purchase:
Conventional 1st Loan: $2.5 million (50%)
SBA/CDC 2nd Loan: $2 million (40%)
Owner Down Payment: $0.5 million (10%)
Total Project Cost: $5 million
In this case, you could still obtain a loan of $3 million from your CDC in a future 504 loan, since you didn’t reach your $5 million SBA limit in this transaction.
The breakdown is somewhat different for larger loans. If you are looking to purchase a $15 million building, for example, you will need a loan of over 50% of the total ($8.5 million) from your conventional lender, which will then be joined by $5 million from the SBA (the typical loan limit for a 504 loan) and $1.5 million from you (the 10% down payment):
Conventional 1st Loan: $8.5 million
SBA/CDC 2nd Loan: $5 million
Owner Down Payment: $1.5 million
Total Project Cost: $15 million
Now that all of that is clear, we can point out that manufacturing projects and projects that include SBA energy-efficiency measures are eligible for a maximum loan of $5.5 million from the SBA per project.
Not only that, but there is no limit to the number of $5.5 million loans you can take out, as long as each of them incorporates energy-efficiency measures.
So there are truly limitless possibilities for funding using the 504 loan. Your CDC representative can explain the program in greater detail and can also help you find a conventional lender to work with.
TMC Financing is an SBA Premier Certified Lender and a high-volume loan provider. Its loan experts are ready to guide you through the process of obtaining a first, or an additional, 504 loan. Contact a TMC loan expert today to find out more about this and other ways the 504 loan can be tailored to your specific needs.
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