SBA Loan Closing Process for 504 Loans

The SBA 504 loan is a great alternative financing option for small businesses. It can be used to purchase or renovate commercial real estate, refinance business debt, or for major equipment purchases.

Like all loans, the SBA 504 has a closing process. And like all real estate deals the goal is simple: close the loan as seamlessly as possible.

Working on an SBA 504 loan for commercial real estate? Here are the steps you can take to make your SBA loan closing process smoother.

How are 504 loans different than other commercial mortgages?

The SBA 504 loan is what’s known as “takeout” financing. This means the 504 loan closes after your project is completed and you verify that you used the money as approved. With that, you may need an “interim” loan between the start and end of your project. Usually, your lender providing the first mortgage/lien financing will provide the interim loan. When the SBA 504 closes, it will pay off the interim loan.

While this is straightforward when your business uses the SBA 504 to purchase existing real estate as-is, it can be more challenging when your project involves renovations or construction. On a renovation or construction project, the interim loan could be in place for a long time before the project is completed. The documentation from the construction project will also need to be provided to verify the interim loan was used to pay for eligible project costs as approved.

How to make your SBA loan closing process easier and more efficient

When you apply for an SBA loan, your goal is to make it as easy as possible for the SBA to give final approval on your loan. Taking these steps will help you track your project’s activity and will lead to a smoother loan closing.

1. If your real estate project involves construction, set up a new checking account that’s only used for project expenses.

All your project-related payments should run through one account and be paid with checks. This makes it easier to separate eligible project-related payments from your normal business operations. When you’re managing the construction project while running your business, it can be easy for your project payments to get lost among your day-to-day expenses. Don’t ever use personal credit cards for SBA 504 project expenses.

Having a designated account for your 504 project-related costs will go a long way toward simplifying and speeding up the final closing for your 504 loan.

2. Deposit your owner-equity requirement as soon as this separate checking account is set up.

The SBA requires your owner-equity funds to be “seasoned.” This means that they’re from trackable personal or businesses sources and not from borrowed sources unless this was previously disclosed. These funds need to have been available for two months prior to closing.

If your equity is coming from different sources (such as your business cash reserves, a home equity loan, or your personal savings), put all the funds in one account right away. Leave the funds there until they’re used for your loan closing. Having these funds in your dedicated project account makes it much easier for you, your lender, and the SBA.

3. Be sure to keep accurate and trackable records of all expenses.

As your project progresses, there will likely be expenses that you’ll need to pay. Be sure to keep your invoices, receipts, and anything else that shows how much you paid, how you paid it, and when.

4. Hire an attorney who is experienced in commercial real estate transactions and SBA-related projects and closings.

Real estate transactions can be stressful under even the best circumstances. That’s why it’s smart to hire an attorney who has solid experience with commercial real estate transactions. If possible, verify they have SBA closing experience.

5. Use the checklist that’s provided to you.

As part of your SBA loan closing process, you’ll receive a checklist that includes all the items you need for your loan. Following this list will go a long way toward helping you achieve a smoother closing.

If you have questions or don’t understand something on the checklist, reach out to your lender and closing attorney for clarification. They’ll help you figure out which documents you need to provide, as well as which items your attorney and/or accountant should provide to you.

It’s also essential that you and your financial and legal teams (as applicable) gather necessary documents as soon as possible. You likely already have many of them and they will simply need to be scanned or copied. You might need to request other documents from third parties, such as insurance agencies or banks, and this could take longer.

Make sure to keep all your business’s legal-entity documents in a single hard-copy file and an electronic file. Include filings with state and local agencies for your d/b/a, LLC, or related paperwork, as well as sales-tax certificates and assigned DUNS numbers, as applicable.

6. If you run into problems or issues with your project, let your loan officer know right away.

The sooner your loan officer knows about an issue, the sooner they can help you resolve it. Get in touch with them right away if your project runs into problems.

The SBA 504 loan is a terrific option for commercial real estate projects, major equipment purchases, and more. It offers eligibility criteria that make it easier for many small businesses to qualify and affordable repayment terms. Every day, Pursuit helps business owners like you successfully close on SBA 504 loans.

If you have an SBA 504 loan application underway and you have questions or problems, get in touch with us today – together, we can work out solutions.

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