FAQs - Eligibility & Restrictions

How does the SBA define “small business ”?

For purposes of an SBA 504 loan, a business qualifies as “small” if it is a for-profit enterprise; is independently owned and operated; does not dominate in its field; does not have a tangible net worth in excess of $8.5 million, and does not have an average net income in excess of $3.0 million, after federal taxes, for the two preceding years. The SBA will make loans to sole proprietorships, corporations, partnerships, limited liability companies and combinations thereof. For example, a common loan structure is to have a Limited Liability Company own the real estate, and lease it back to an Operating Company, which is an S-Corp.

Do “start-up” companies qualify for a 504 loan?

Because the eligible uses for an SBA 504 loan are limited to real estate and machinery/equipment (excluding office equipment and computers), the loan program is primarily geared towards existing businesses which are seeking to expand. Start-up companies are not excluded from using an SBA 504 loan, however, the SBA will require a higher level of injection from the company than the 10% minimum.

Is an applicant with personal liquidity disqualified from receiving funds through the SBA 504 loan program?

A three-level test based upon the size of the total financing package is used to calculate when liquid assets must be used by the borrower to reduce the SBA portion of the package. Liquid assets include: cash, savings accounts, CDs, marketable securities, and cash surrender value of life insurance. Assets that are NOT considered liquid include: real estate, closely-held non-marketable stocks, IRAs, 401(K) or Keogh Plans or other retirement accounts. The SBA requires personal resources that exceed the maximum amount be injected into the total financing package when the owner's liquid assets exceed the amounts below:

The amount of Personal Liquid Assets that must be injected into
the project is the amount exceeding:

$250,000 or less: 2x the total financing package, or $100,000, whichever is greater.

$250,000 - $500,000: 1.5x the total financing package, or $500,000, whichever is greater.

$500,000 or more: 1x the total financing package, or $750,000, whichever is greater.

Is an applicant automatically ineligible if they have had a prior bankruptcy?

If the bankruptcy was more than five years ago, and if there is a satisfactory explanation for it, the applicant may still be eligible for the SBA 504 loan program.

I own my building on a Contract for Deed. May I use the SBA 504 loan to purchase the building when the balloon payment comes due?

An SBA 504 loan may only be used to finance new construction or new purchase of a building. Loan proceeds may not be used to refinance existing debt. Any debt older than nine months at the time the SBA application is submitted is considered refinance.

Note: effective March 2009, businesses have permission to refinance debt with an SBA 504 loan as long as the amount being refinanced does not exceed 50% of the project cost of the project financed, AND if the following conditions are met:

(A) The new loan involves business expansion

(B) It is collateralized by fixed assets

(C) Existing debt incurred for benefit of small business

(D) Proceeds used to acquire land, to construct or expand building, or to purchase equipment.

(E) Borrower is current on all payments of existing debt for 1 year

(F) New financing will provide better terms or interest rate

(G) New financing will be used only for refinancing existing debt, or for cost related to project being financed

What ongoing restrictions and loan covenants will the SBA require?

Some typical covenants include the following: