SBA 504 Loan Structures: The Flexibility to Close More Deals
The SBA 504 loan program usually requires 50% bank financing, 40% 504 financing, and a 10% balance in owner equity. While this 10/50/40 split is certainly the most common loan structure, not all 504 deals fit neatly into this box. The program is flexible enough to allow for a variety of alternate deal structures to help promising, non-traditional deals come to life.
Here are some real-life examples where we partnered with banks and their customers to adjust 504 deal structures and developed creative, win-win solutions:
1. Deal success story: Keeping a borrower under the SBA’s $5 million maximum
Challenge: Experienced hotel owners approached their bank with an opportunity to purchase and improve another hotel. However, they had outstanding SBA debt on their existing properties — and an additional SBA loan would push the borrowers past the SBA’s maximum of $5 million in outstanding loans.
Solution: The project totaled approximately $11.6 million, so given the SBA borrowing maximums and the borrower’s existing SBA debt, The 504 Company could only fund 27% of the deal. Our lenders recognized that banks can fund more than 50% of a project if the 504 loan amount is capped due to previous SBA borrowing. Seeing the potential in the deal, the bank agreed to fund 59%. The clients contributed 15% owner equity and the loan was closed.
Impact: By using a non-traditional 504 loan structure, the bank and The 504 Company were able to leverage the benefits of 504 financing while keeping the borrower under the SBA maximum. The business was able to maintain current staff, add two additional full-time positions, and make significant improvements to its property.
504 Structure Breakdown
2. Deal success story: Borrower seeks to contribute more than 10% equity injection
Challenge: When the owner of a Hudson Valley sound and lighting company needed to expand the company’s operational and warehouse space, a previously purchased property proved to be the ideal location.
This deal was complex for a few reasons. First, the property included a single family home. The existing mortgage was not eligible to be refinanced with 504 loan proceeds since the original purpose of the mortgage was to purchase ineligible (residential) property. Second, the client qualified for the 10% equity injection but wanted to contribute more to reduce the business’s overall debt. Finally, the client wanted to maximize the amount of the 504 loan because of the 20-year fixed rate.
Solution: Our lenders reviewed the overall situation with the bank and together, arrived at a solution. The bank, The 504 Company and the client agreed to an owner-equity injection of 21%, with the balance equally split between the bank and The 504 Company. Since the project qualified for a 10% injection, the SBA allows the additional borrower’s injection to reduce the bank’s portion. To eliminate the barrier presented by the residential property, the bank refinanced the existing mortgage and was able to add it to their first mortgage loan.
Impact: The business owner is moving forward with their plans and the deal enables the retention of nine full-time jobs in a rural area, resulting in an important economic impact on that community.
504 Structure Breakdown
The 504 Company is your partner in growth
Even when projects don’t meet the 504 program’s standard 50/40/10 structure, The 504 Company has the flexibility, experience and knowledge to help you and your clients find solutions. Together, we can help you meet your small business lending goals while providing your clients with the funding options they need to achieve their dreams and strengthen their communities. Contact us today.