NYBDC Loan Officer, Arami Jung, is published in KoreaDaily
Preserving Working Capital by Financing 90% of Total Project Cost
The Small Business Administration (SBA) has number of loan programs, one of which is its best kept secret, 504 program. The SBA 504 program is a hidden treasure which small business owners should familiarize with as the program has many benefits for the borrowers and the lenders. However, the program hasn’t been utilized to its full potential as it is not well known even among the bankers.
The SBA 504 program enables the borrower to preserve its working capital by financing 90% of total project cost. Often, after the borrower makes big down payment in acquiring the business assets from its personal and business savings, the business is hampered by its lack of sufficient working capital. With low down payment of 10% borrower’s injection, the business owners may retain the needed working capital to sustain and grow their business.
The eligible 504 project is to purchase or renovate an existing building, construct a new building or purchase long term machine & equipment. The building must be minimum 51% owner occupied and includes not only commercial and mixed use buildings but also commercial condominium and coop units. Refinancing of an existing debt is eligible but the existing debt’s original purpose needs to be eligible under 504 program and be part of business expansion with its portion not exceeding 50% of total project cost.
The program entertains existing business as well as start-ups. In case of a start-up, higher borrower’s injection is required. For start-up business, the SBA requires minimum 15% down payment instead of 10%. In addition to being a start-up business, if the subject building is special purpose one such as car wash, gas station, hotel, golf course, nursing home and so forth, then 20% borrower’s equity contribution is needed.
A unique part of the SBA 504 program is that the financing is participated by two entities, a bank and a Certified Development Corporation (CDC). The bank does not need to be an approved SBA lender to participate in the 504 program. The CDC is non-profit organization licensed by SBA to do 504 loans. Empire State Certified Development Corporation (Empire State CDC) is a CDC that is well recognized with its services and size not only in NY but also in national level. Empire State CDC, as a leader in 504 program, supports job retention and creation together with the growth and expansion of small business.
If you have a small business or plan to start one then you are most likely to be eligible to obtain SBA 504 loan. The below are some of key facts you would like to keep in mind as the SBA 504 loan eligibility:
· The building needs to be minimum 51% owner occupied.
· The business needs to be small and for profit.
· The business needs to be owned at least 51% by US citizen or permanent US resident.
If all of the above conditions are satisfied, the following documents may be prepared prior to discussion with your bank’s loan officer to expedite the loan processing:
· The most recent three year business tax returns
· The most recent three year personal tax returns
· Personal financial statement
· Business plan
The SBA 504 program has additional benefits other than low 10% borrower’s equity contribution which we will take a look at next time.
Prepared by: Arami Jung, Loan officer, Empire State Certified Development Corporation