Buying commercial property for your small business is one of the best investments you can make – and if you need financing, then the U.S. Small Business Administration’s (SBA) loan program, the SBA 504, is a perfect option.
In this overview, you’ll learn the SBA 504 loan program’s benefits and follow the SBA 504 loan application checklist to help you learn about the types of documents needed to apply.
It may seem like there’s a lot of information to gather, but don’t panic! You most likely have most of the documents on hand already or can get them without too much difficulty. By preparing now, you’ll make the loan process much smoother.
What is the SBA 504 loan program?
The SBA developed the SBA 504 loan program to help more small business owners purchase, renovate, or construct commercial real estate for their businesses. It can also be used to refinance higher-cost debt taken on for these purposes and to purchase major assets, such as manufacturing equipment. The program offers financing up to $5.5 million, and most small businesses are eligible to apply.
Here are some of the key benefits:
- Lower down payment: Traditional commercial mortgages require higher down payments, typically 20% or more, while most SBA 504 loans only require a 10% down payment. This makes ownership more realistic for many small business owners.
- Flexible criteria: The SBA 504 loan program has more flexible criteria for meeting the down-payment requirement, which puts it within reach for more entrepreneurs.
- Affordable interest rates: The SBA 504 loan offers a below-market and fixed interest rate for the life of the loan, so payments are predictable and easier to budget.
- Longer repayment terms: The program offers repayment terms up to 25 years, which can lower monthly payments to a more affordable amount. For many business owners, the costs of property ownership are similar to leasing, while they gain all the benefits of ownership.
- Long-term benefits: Your business can gain significant tax advantages, equity growth, and long-term stabilization of building-occupancy costs – and you never need to worry about losing a lease and having to relocate.
Another great feature is that SBA 504 loans can be used for single-and mixed-use properties. When you own the property, it’s a solid investment in your own financial future, too.
How SBA 504 financing works
SBA 504 loans are made in partnership between a business owner (or owners), a Certified Development Company (CDC), and a bank:
- You make as little as a 10% down payment on the project
- The bank funds 50% of the project costs with a conventional mortgage
- A CDC funds up to 40% of project costs with an SBA 504 loan
For example, if you request a $600,000 loan, your down payment would be $60,000, the bank would lend $300,000, and you’ll secure $240,000 through the SBA 504 loan.
SBA 504 loan application checklist: Loan documents
Here’s the SBA 504 loan application checklist to show the fundamental documents required for most SBA 504 loans – use this as a guide to help you prepare for the loan process. When you’re ready to move forward, your CDC and bank representatives will provide you with information on the specific documents that you’ll need for your application.
As you review the checklist, keep in mind that your lender will provide you with the SBA-generated forms that you’ll need, as well as their own application forms:
1. Personal Financial Statement (SBA Form 413)
The SBA Form 413 provides the lender with information about the personal finances of owners who have a 20% or greater ownership stake in your business.
2. Owner questionnaire
Owners with a 20% or greater ownership stake in the business must be personal guarantors for the loan, although for most SBA 504 loans, the property serves as collateral. When filling out this form, owners will be required to provide an SBA-approved form of photo ID, too. Depending on the lender, these may include a state-issued driver’s license or ID card, such as a U.S. passport, a social-security card, or a birth certificate.
3. Management profile or resume
Your lender and the SBA want to know that you and your team have experience that can help support your success. Provide a management profile or resumes for owners.
4. Business-formation documents
Depending on your business, you may need to provide Articles of Incorporation, contracts and agreements, and others. Have a copy of your business-formation documents, as well as any required licenses or insurances.
5. Business financial statements
If your business is in operation, you’ll need to provide key financial documents, including the past three years of filed business tax returns, along with interim financial statements (year-to-date profit-and-loss statement, and your balance sheet) dated within 60 days of your application. Also, provide a list of all current business debts, including creditors, original loan amounts, current balances, interest rates, and monthly payments.
6. Personal tax returns
You’ll need to provide personal income-tax returns for anyone with an ownership stake of 20% or more.
7. Financial projections
Have a detailed, two-year projection of income and expenses. Along with this, include a copy of your business plan to show lenders how you intend to meet your projections.
8. Sale contract for the property
If you’re using the SBA 504 to purchase an existing building or land, you’ll need the contract for the sale of the property to you. In addition, if your purchase includes equipment or other assets, you’ll need proof of this.
9. Estimates for any equipment, fixtures, or renovations included in the project
These need to come from a third-party and be on their letterhead.
It’s important to know that your lender or the SBA may have additional forms or documents, such as an appraisal, that are needed before your loan can be approved. Your lender will advise you about this as part of the application process.
Pursuit can help with your SBA 504 loan and more
If you’re interested in learning more about the SBA 504 loan program, Pursuit can help.
Pursuit is a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware. We offer loans and a line of credit for working capital, commercial real estate, equipment, and much more.
We’ve helped thousands of small business owners get the funding they need to achieve their goals, and we can help you, too.
