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7 Ways to Meet the SBA 504 Owner-Equity Requirement

7 Ways to Meet the SBA 504 Owner-Equity Requirement

Having a “small business” doesn’t necessarily mean you’ll have low startup or operational costs, and nearly all businesses need funding to help them grow. The U.S. Small Business Administration (SBA) 504 Loan program is one of the best programs available for small businesses to acquire or improve business-related property, purchase equipment, or refinance mortgage debt. Many eligible business owners don’t apply for the program out of concern that they can’t meet the owner-equity requirement of 10% to 20%—but there are many ways in which this requirement can be met.

The 504 loan program builds in significant flexibility regarding acceptable forms of owner equity. In this article, we’ll look at the different types of equity and how one or a combination of several can help most otherwise-eligible business owners to conquer the owner-equity requirement.

Owner-Equity Basics

The 504 program is designed to conserve working capital in connection with capital projects. With loans up to $5.5 million, the 504 program provides sufficient funding to help with large expenses, like machinery and property, while also allowing for preservation of working capital and refinancing of higher-cost existing business debt.

For most owners of existing (or acquired) businesses, the equity requirement is 10% of the total eligible project costs. For start-up businesses in operation a year or less and special-use properties, the equity requirement typically increases another 5% to 10%.

The SBA allows for several equity sources that can be used independently or together to meet this requirement.

Acceptable Types of Owner-Equity and Helpful Tips

1. Business reserves or personal savings

These are the most common sources of owner equity. In the case of business cash, in addition to the applicant business, this can include contributions from affiliate business entities.

Good to know: When you and your clients work with The 504 Company, our team will analyze their working capital to ensure that their business’s balance sheet isn’t adversely affected when they use business reserves as equity.

2. Gifts

Often, people close to the business owner(s) will make gifts to the owners to help them get their businesses off the ground.

Good to know: When using gifts toward owner equity, all reputable lenders require gift letters and fund verification at the time of application and/or closing.

3. Existing equity in land or buildings

SBA 504 loans often involve additions, improvements or renovations to property that the business already owns. The existing equity can be counted toward the required injection even if the property already has a mortgage. 

Good to know: If a business owner chooses to use equity in existing property, the value will be determined through an appraisal. Depending on the outcome, their equity in the property can be used toward part or all of their contribution.

4. Seller financing

When an existing business or property is acquired, a seller may take partial payments over a specific period. This arrangement may be eligible toward the owner-equity requirements, as long as the seller’s repayment terms align with the terms of the 504 loan.

Good to know: In this arrangement, the 504 loan will have the senior loan position and the seller’s loan can’t be paid back before the 504 loan, although both loans may be repaid faster than the original term.

5. Borrowed business funds

This includes funds from economic development agencies, loans against other commercial properties owned by the applicant and similar borrowed funds. 

Good to know: To help ensure that the business owner doesn’t take on too much debt, the advisors at The 504 Company will verify repayment sources and confirm that payments on their outstanding loans are feasible. Any 504 loans take the priority position to other borrowed business funds, and the other loans will need to be repaid on the same terms as the 504 loan. 

6. Borrowed personal funds

This typically includes home equity loans or line of credit. 

Good to know: As with other borrowed funds, The 504 Company will verify that repayment of the home equity loan or line of credit is feasible from the business owner or other sources to ensure that they have enough income to cover this and any other debts. 

7. Grant funds

There are a few grants developed to stimulate job creation or growth in specific industries, and awarded grants can count toward owner-equity requirements.

Good to know: If the business has been approved for grant funds that can be applied toward eligible project costs, then a grant-award letter at time of application can count toward owner-equity requirements. For the loan to close, the business owner may need bridge financing that covers the grant proceeds until those funds are available, which often is after the work is underway or completed.

Find out how a business's resources can meet the owner-equity requirement

In many cases, owners have more equity-related resources than they realize. If you’re interested in working with The 504 Company on a 504 loan for your client, reach out to us today. We’ve helped hundreds of small businesses in New Jersey, New York and Pennsylvania to meet this requirement, prepare applications and successfully obtain 504 loans that have helped them significantly grow their businesses.

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