SBA 504 Equity Requirements: Multiple Sources Make It Easier

SBA Equity Requirements

There are many benefits to the SBA 504 business loan program that make it a great option for your small business. One of the biggest benefits? You only need to put 10% down for most projects, making it more affordable when you compare it to traditional commercial loans.

Better still, the SBA equity requirements allow you to use multiple sources for the owner equity portion. That means it may be easier than you think to meet the requirement.

Find out more about the SBA 504 program, what equity sources are eligible, and more.

What is the SBA 504 loan program?

The SBA 504 loan program provides long-term, fixed-rate financing up to $5.5 million for major fixed assets. You can use it to purchase owner-occupied commercial real estate as well as heavy equipment. It can also be used to refinance debt for commercial real estate and equipment purchases.

Loan terms for the program can go up to 25 years and many projects only require a 10% down payment. That means your payments will be affordable and 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 down payment of cash, 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.

Approved sources of owner equity 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 and/or personal cash from you or your business partners. Cash that’s been documented as gifted (funding that doesn’t need to be repaid) 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.
  • Assets other than cash. If your 504 project is for an expansion, your lender can evaluate the value of assets that are offered by you or your business partners. Talk with your SBA lender. They can walk you through the steps you need to get an appraisal or asset valuation by an independent third party.
  • Standby debt. This is a loan that’s made to help you meet the equity requirement. If you’re considering using standby debt, your SBA lender can walk you through the process to ensure it’s eligible.
  • Equity. If you’re using a 504 loan to refinance debt, the equity you’ve built up in your space and property can be used to meet the equity requirement too!

How SBA equity requirements are validated

When you apply for an SBA 504 loan, your loan officer will work with you to ensure that your owner-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 throughout New York, New Jersey, and Pennsylvania get the funds they need to launch and grow their businesses and we can help you, too.

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