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504 Frequently Asked Questions

What is the 504 loan program?

The SBA 504 Loan Program assists small business owners looking to expand their businesses through the purchase of commercial real estate or capital equipment. NEDCO works in conjunction with lenders to provide up to 90% financing for commercial property purchases and construction.

How does the program work?

NEDCO provides up to 40% of the total project cost with a 10 or 20 year loan, which has a fixed rate of interest for the life of the loan. The lender finances 50% of the project and the borrower puts down as little as 10% equity into the project.

Sample Project

Source Percentage Project Amount Lien Position
Financial Institution 50% $500,000 1st
NEDCO / SBA 40% $400,000 2nd
Business Owner 10% $100,000
100% $1,000,000

* Start up properties require 15% equity, special purpose properties require 15% equity, and properties that are both a start up and special purpose require 20% equity.

What are the permitted uses of 504 Loan Proceeds?

What are the unpermited uses of 504 loan proceeds?

What are the economic development requirements?

The SBA 504 is a community lending program designed to improve the locality through helping small businesses make an impact on the community. Thus, eligibility requires that one of the following economic development goals be met:

Job Creation and Retention
Public Policy
Community Development

What are the minimum and maximum amounts of a 504 loan?

Signed into law on September 27, 2010, the “Jobs and Lending Bill” (H.R. 5297) included numerous provisions that removed the ceilings on lending amounts for specific economic development requirements previously set forth by the SBA. No longer having such limits, NEDCO may lend up to 40% of the project cost with a new dollar cap of $5.0 million for all projects.

Additionally, NEDCO may increase the dollar cap to go as high as $5.5 million for SBA financing on eligible manufacturing businesses. Projects that incorporate energy saving technologies for sustainable design have also become eligible. Such examples include:

Regarding a minimum loan amount, an SBA 504 loan must be at least $50,000. However, under good cause shown, SBA may permit a 504 loan as small as $25,000.

What are the rates and terms of a 504 loan?

The interest rate on the SBA 504 loan is set when the SBA sells the bonds (debentures) to fund the loan. When determined, the rate is then fixed for the duration of the loan in a self-liquidating arrangement. Current and historical SBA 504 rates can be found by clicking here.

Due to the 504 debentures being fully amortized securities, there are no balloon payments of any kind. However, because of the debenture funding, there is a premium for prepayment during the first half of the loan term.

The terms of a NEDCO loan may only be 10 or 20 years. For NEDCO to do a 10 year loan, the lender must have at least a seven year term or balloon of not less than seven years on the 50% first mortgage. Similarly, for NEDCO to do a 20 year loan, the lender doing the 50% first mortgage must have at least a ten year term or balloon of not less than ten years.

The rate on the 50% first mortgage can be adjusted at anytime of the lender’s choosing. However, that lender may have a longer payout as some lend for a 10-20 year term and have a payout of 20-25 years.

What are the collateral requirements?

NEDCO takes a subordinate (second mortgage) position to secure its 40% portion of the financing, and a security interest in all assets financed. A life insurance condition is generally not required unless there is no succession plan in management. Further assets of the business or principals are generally not required, unless: the company is a start-up, the credit is unusually risky, or the assets being financed are considered “single purpose” or don’t appraise high enough.

How are fees assessed and payments handled?

The promissory note for the loan will be signed for the 40% of project costs plus all associated origination fees. Furthermore, the borrower’s monthly payments will include program fees and a loan loss subsidy fee that are also financed and amortized over the loan term.

Once the 504 loan closes, payments are made through an ACH debit of the borrower’s designated checking account on the first of each month. Payments on the 504 loan are made separately from the payments on the 50% first mortgage loan with the lender.