Best Practices: Requirements and Uses of SBA Loans

The U.S. Small Business Administration’s 504 Loan Program was created to foster economic development and create or retain job opportunities and stimulate growth, expansion, and modernization of small businesses by providing long-term financing of fixed assets for small businesses.  504 Projects are accomplished through the partnership between the Third Party Lender who provides 50% or more of the financing, the Certified Development Company (“CDC”) who provides up to 40% of the financing through a 504 debenture, and the Applicant who injects at least 10% of the financing needed for the Project.

To qualify for financing under the 504 Loan Program, each 504 Project must satisfy at least one of the economic development objectives discussed in sections 13 CFR §§ 120.860 – 120.862.  These economic developments objectives are:

(1) at least 1 Job Opportunity, defined as a full time (or equivalent) permanent job created within 2 years of receipt of 504 funds, or retained in the community because of a 504 loan, must be created or retained per every $90,000 of project debenture ($140,000 for Small Manufacturers (small businesses whose NAICS codes start with 31, 32 or 33 and with all of its production facilities located in the United States);

(2) community development goals, such as:

(a) improving, diversifying, or stabilizing the economy of the locality,

(b) stimulating other business development,

(c) bringing new income into the community,

(d) assisting manufacturing firms (NAICS codes start with 31, 32 or 33), and

(e) assisting businesses in Labor Surplus Areas (as defined by the Department of Labor); or

(3) public policy goals, such as:

(a) revitalizing a business district of a community with a written revitalization or redevelopment plan,

(b) expansion of exports,

(c) expansion of small businesses owned and controlled by women and/or veterans,

(d) expansion of minority enterprise development,

(e) aiding rural development,

(f) increasing productivity and competitiveness through the use of retooling, robotics, modernization, or competition with imports,

(g) modernizing or upgrading facilities to meet health, safety, and environmental requirements,

(h) assisting businesses in or moving to areas affected by Federal budget reductions, including base closings, either because of the loss of Federal contracts or the reduction in revenues in the area due to a decreased Federal presence,

(i) reduction of rates of unemployment in Labor Surplus Areas,

(j) reduction of energy consumption by at least 10 percent,

(k) increased use of sustainable design, including designs that reduce the use of greenhouse gas emitting fossil fuels, or low-impact designs to produce buildings that reduce the use of non-renewable resources and minimize environmental impact, or

(l) plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings’ or communities’ consumption, commonly known as micropower, or renewable fuels producers including biodiesel and ethanol producers.

If the Project qualifies under at least one of the economic development objectives above, then 504 Project loan proceeds may be used for the following:

• Land and necessary land improvements costs, such as costs of a building and building improvements (i.e. heating, electrical, plumbing, roofing, façade expenditures), grading, new streets including curbs and gutters, parking lots, utilities, and landscaping;
• All costs associated with the purchase, transportation, dismantling or installation of machinery and equipment that has a useful life of at least 10 years;
• Furniture and fixtures if essential to and a minor part of the Project which will not affect the weighted average maturity;
• Professional fees directly attributable and essential to the Project with the exception of attorney’s fees incurred in closing the Interim and Third Party loans;
• Any costs incurred for the above discussed items prior to the date of application that are directly attributable to the Project (net of Applicant’s contribution)
• Short-term debt which was incurred to obtain financing until longer term financing could be obtained for any of the costs discussed above that are directly attributable to the Project (net of Applicant’s contribution) provided that such financing is for a term of 3 years or less;
• Repayment of interim financing including points, fees, and interest;
• A construction contingency that does not exceed 10% of Project construction costs;
• Permissible debt refinancing without expansion of an Applicant;
• Permissible debt refinancing with expansion of an Applicant;
• Eligible administrative costs (i.e. SBA Guarantee fee, Funding fee, CDC processing fee, CDC closing fee, Underwriters’ fee)

For questions regarding the 504 Loan Program, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com