SBA 504 Loan Fees: Key Points for Business Owners

Loan officer discussing SBA 504 rate fees

If you’ve never applied for a business loan before, you might feel overwhelmed by the technical terms and fees involved in the process. Lenders want to make the loan process as transparent as possible so you can get the funding you need to transform and grow. In this article, you’ll learn all about SBA 504 loan fees and terms like “net debenture” and “gross debenture” that you’ll encounter during the SBA 504 loan process.

SBA 504 loan fees: The basics

Most business loans include some fees and SBA 504 loans are no different. Some of the fees are one-time charges that you may need to pay upfront, during the underwriting process, or at closing. These one-time fees include an application fee and a commitment fee that a lender is allowed to charge, based on SBA guidelines. Other fees can be rolled into the loan and paid over the life of the loan, such as administrative costs that are financed into the loan.

Before we break down the fees associated with an SBA 504 deal, here’s some information about SBA 504 loans that can help you understand several of the terms:

  • When you go to your personal or commercial bank, you’re able to deposit and withdraw funds; banks can also directly loan you money. CDCs aren’t banks and don’t hold funds so when loans are made through CDCs, the portion that they provide is raised through other means, such as a “debenture” or a bond.
  • When you apply for an SBA 504 loan, you’re provided with a “net debenture” amount. This amount is the total amount that a CDC will provide for your loan.
  • You’ll also be provided with a “gross debenture” amount, which is higher than the “net debenture.” This amount is the amount that the CDC will provide plus any fees that are rolled into the net debenture.

For SBA 504 loans through a CDC and a partnering bank, borrowers may also be charged:

  • A one-time, $1,500 application fee
  • A commitment/closing fee, calculated at up to 1% of the gross-debenture amount or a maximum of $10,000. This acts as a deposit early in the process and is later used to pay the CDC attorney towards all related closing costs.

What are the fees and how are they calculated?

The easiest way to explain the fees, how they’re calculated, and how they impact the gross debenture is with a sample fee chart. Keep in mind that the calculations for your own SBA 504 loan fees will depend on the amount you borrow, as well as rates for fees at the time of your application. Your CDC and the bank that’s partnering on your SBA 504 loan, will provide this information to you. Here’s an example of the fee schedule for a $1 million deal:

Net debenture$1,000,000Fee %
SBA guarantee fee $5,000.000.5000%
Funding fee $2,500.000.2500%
CDC processing fee $15,000.001.5000%
Closing costs $2,500.00
Underwriters’ fee $4,000.000.4000%
Total fees $29,000.00
Gross debenture $1,029,000.00

In addition:

  • The SBA guarantee fee is the percentage of the net debenture that the SBA charges to provide guarantees to lenders. Although it’s an additional fee for borrowers, the guarantee is the cornerstone of the SBA program. The guarantee is the reason why lenders are able to make loans to small businesses that require flexibility when it comes to funding.
  • The funding fee and the CDC processing fee are administrative costs that are passed onto the borrower for originating and processing the loan package.
  • The closing costs are the part of the commitment fee that are used toward filings and processes that are necessary for the deal to close and be officially recorded.
  • The underwriters’ fee enables lenders to pay for the costs associated with organizing and analyzing the loan application package to get it on its way to a decision.

What happens after your loan closes

To enable CDCs to raise funds that can be loaned to other small businesses, when an SBA 504 loan closes, the debenture can be sold on what’s called a “secondary market.” When that happens, it’s normally seamless for you. You’ll still make payments to your CDC as agreed when your loan closed. Additionally, depending on your loan amount, you may receive a refund of up to $2,500 after the debenture is sold.

Common borrower questions

In addition to the information provided here, these are some of the most frequently asked questions about SBA 504 loan fees:

Will the application fee be refunded?

If and when the loan closes, this is refunded to you after the debenture sale. If the loan doesn’t close, then the application fee is kept by the lender.

Why am I paying two commitment fees?

With an SBA 504 loan, there are two loans being made: One through your CDC (for 40% of the project cost) and the other through the bank you’re partnering with (for 50% of the cost). As these are two loans separate loans, two commitment fees are required.

Why is my loan amount higher?

While there are some loan fees that are paid outright, other fees are rolled into the loan total and paid over the course of the loan. The gross debenture includes the additional fees that are lumped into the loan. Although these slightly raise the monthly payment, this method saves you a lot of money upfront.

Knowledge is power and Pursuit can help

When applying with Pursuit or any other lender for business loans, the better you understand the process, the easier it will be for you. If you have additional questions, we encourage you to visit our business resources or contact us – we’re here to help.

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