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Frequently Asked Questions

You're all about finding the best available solutions for your clients and Mountain West Small Business Finance is all about providing them. The following questions should provide all the help you need to understand and communicate the differences and benefits of the 504 loan program. But, if you find you still have a question or two, give us a call and we'll do our best to provide the answers you need.





What is the minimum down payment required?

504 loans require a down payment of between 10% and 20%. A 15% down payment is necessary when a business is a start-up enterprise (less than 2 years old) or when the project property is considered special-purpose. A 20% down payment is required in situations involving both a start-up business and a special-purpose property. Other credit worthiness factors may impact the amount of down payment required.
 


How long does it take to obtain approval for a 504 loan? 

A lot depends on the borrower. With complete information and documents, we can pull together the loan package quickly. The timing often depends on obtaining the appraisal and environmental reports as early as possible. All things being equal, MWSBF routinely meets the demands of a 45-day escrow. It is always good advice to bring us into the process early in order to discuss the project timing. In any event, SBA loans do not take longer to approve than conventional loans.

 


How much does a 504 loan cost? 

When the loans close and the SBA 504 loan is funded, the borrower will incur various fees totaling approximately 2.65% of the loan amount, plus an attorney closing fee of around $2,000. These fees are financed within the debenture loan proceeds so they are not out-of-pocket expenses. Fees are broken down as follows:

• CDC Processing Fee of 1.5% of net debenture amount
• Reserve Deposit Fee paid to SBA to cover loan deficiencies and to defray operating costs of the program of .5% of net debenture amount
• Loan Funding Fee paid to SBA of .25% of net debenture amount
• Underwriting Fee paid to private market for selling the debenture of .4% of gross debenture amount
• Attorney Loan Closing Fee for preparation of loan closing documents


 


What will be my interest rate on the 504 loan?

The interest rate on the loan will be determined by a market sale of the bond at the time the 504 debenture pool (the pool of 504 loans) is sold and the interest rate will be fixed for the term of the loan. It is this 100% government guarantee that experts predict will enable the bond to be funded at below conventional lending interest rates and on a fixed-rate basis. The effective rate (which includes all ongoing fees) is roughly equal to the 10-year Treasury bill rate when the debenture is sold, plus approximately 2%.
 


Is there a penalty if I prepay my loan?

Yes. However, the amount of the prepayment penalty decreases each year and disappears after year five for a 504 loan with a 10-year maturity and after year 10 for a 504 loan with a 20-year maturity. The formula for calculating the prepayment penalty on a 20-year 504 loan
 
Sample Prepayment Penalty Schedule

SBA 504 Loans have a Prepayment Penalty based on a predetermined schedule, which is based upon the rate of the underlying bond or debenture.

The prepayment schedule for a loan with an underlying debenture rate of 7.25% is as follows:

For a twenty year loan



For a ten year loan



 


What are SBA's requirements for appraisals?

Generally, SBA accepts the appraisals from the first mortgage lender. 
 


Is an environmental report required when the purchase of real property is being financed with an SBA 504 loan?

Yes, typically SBA loans will require a transaction screen or Phase 1 environmental report. California Statewide works closely with the lender to insure that the appropriate environmental reports are conducted for the project property. 
 


What are SBA's requirements regarding the Loan terms from the Participating Lender?

• The Lender Loan must have a term of at least 10 years when the 504 loan is for 20 years and 7 years when the 504 loan is for a term of 10 years.
• Interest rates must be reasonable.
• The Lender Loan must not have any early call feature or contain any demand provisions unless the loan is in default.
• The Lender Loan must not be open-ended.


 


What are the general rules to determine if a Project Financing Structure qualifies for an SBA 504 loan?

• The Lender financing must be equal to or greater than the debenture.
• The net debenture may not exceed 40% of the total cost of the project.
• The borrower's injection must be at least 10% of the total project cost, and may be more, as required by statute or for credit reasons.
• No more than 50% of the project costs can come either directly or indirectly from Federal sources.