There are many benefits to the SBA 504 loan program that make it a great option for a small business loan. Some of the biggest benefits? You only need to put 10% down for most projects, and the equity requirements allow you to use multiple sources for your owner equity portion. This makes it more affordable and easier to meet the equity requirements than traditional loans.
In this overview, you’ll learn about the SBA 504 equity requirements, what owner equity sources are eligible, and more.
What is the SBA 504 loan program?
The U.S. Small Business Administration (SBA) is the federal agency tasked with helping small business owners get easier access to funding. They have loan programs specifically designed for small businesses, including the SBA 504 loan program. It provides long-term, fixed-rate financing up to $5.5 million for major fixed assets, such as purchasing owner-occupied commercial real estate, heavy equipment, as well as to refinance debt for these purchases.
Loan terms for the program can go up to 25 years and many projects require only a 10% down payment. That means your payments will be affordable and you will keep more money in your business in the long term.
What is owner equity?
Simply put, owner equity is what you’re required to put toward an SBA 504 loan. In many cases, this will just be a cash down payment, like what’s required when you buy a home. However, one of the benefits of an SBA 504 loan is that you’re able to use a mix of sources, including cash, to meet the SBA equity requirements.
What owner equity sources can you use for an SBA 504 loan?
There are multiple types of owner equity that are acceptable under SBA guidelines. The following sources can be combined to meet the requirement:
- Cash that’s not borrowed: This can include cash from your business or personal cash from you or your business partners. Cash that’s been documented as gifted is also eligible.
- Cash that’s borrowed through a personal loan: You can take out a personal loan to cover your equity requirement as long as your income can still cover your expenses. You might opt for this if you’re launching a new business while still working a full- or part-time job.
- Equity in real estate: If your SBA 504 project is for an expansion, your lender can evaluate the as-is value of real estate is already owned by your business. Talk with your SBA lender and they can walk you through the steps you need to get an appraisal by an independent third party.
- Subordinate debt: This is a loan that’s made to help you meet the equity requirement in a subordinate lien position behind the third-party lender and the SBA or Certified Development Company (CDC). If you’re considering using standby debt, your SBA lender can walk you through the process to ensure it’s eligible.
How are SBA 504 equity requirements validated?
When you apply for an SBA 504 loan, your loan officer will work with you to ensure that your equity injection is properly documented to meet SBA requirements. Don’t worry, the process isn’t complicated. Here’s what you’ll have to do:
- Owner equity injections must be substantiated prior to closing. This means your SBA lender will need bank statements from the source of funds.
- If a deposit is made on the property and it’s being used toward the equity injection, your lender will need the deposit check along with the full bank statement that shows the check clearing. You’ll also have to submit bank statements for the past two months. If you haven’t already made a deposit on a property, you’ll still need to send in your bank statements from the past two months to show that the equity is available.
- If any transfers or deposits were made into your account to cover a check or wire transfer, your lender will need the bank statements from that account for the month of the withdrawal or transfer. This is in addition to the prior two months of bank statements that are also required.
Pursuit can help you get the SBA 504 funding you need
If you’re exploring loan options for a commercial real estate project or to buy a fixed asset, or if you just want to learn more about the SBA 504 loan program, contact Pursuit today!
We’ve helped small business owners just like you to get the funds they need to launch and grow their businesses and we can help you, too.
