The borrower must contribute to the project cash (or property acceptable to SBA obtained with the cash) or land (that is part of the project property) valued at 10 percent or more of the project cost. In some cases this equity injection can be borrowed. Examples of this are using an existing business line of credit or borrowing against unrelated assets such as a home equity loan. In all cases, credit and re-payment issues must be addressed.

When an applicant is a start-up business (less than 2 years old), increased equity requirements exists. At a minimum, the borrower in a start-up firm must contribute at least 15% equity. Additionally, some types of assets are considered special or limited purpose. Projects involving these types of assets also require additional equity (5%).  So, if the applicant is a start-up and the project involves a special purpose asset, then the borrower must contribute 20%. The borrower's injection may be in the form of either equity or borrowed funds (with terms acceptable to SBA). The adequacy of the borrower's equity position is a credit matter.

The borrower's contribution may be land (including buildings, structures and other site improvements, which will be part of the project property) previously acquired by the borrower. If the land has been held for at least 2 years, an updated appraisal can be used to determine the value of the contribution. Otherwise the basis for the value of the contribution is cost.

On projects involving new machinery and equipment the cost of the items reflect their value, however with used M & E an appraisal is usually required in order to determine the value.

The borrower may borrow its cash contribution from a third party. If any of the contribution is borrowed, the interest rate must be reasonable. If the loan is secured by any of the project assets, the loan must be subordinate to the liens securing the 504 loan, and the loan may not be repaid at a faster rate than the 504 loan unless SBA gives prior written approval.

The following are some documents that may be used as evidence of the equity contribution:

• Copies of all documents evidencing the source and terms of any loans
• Receipts, canceled checks or other evidence satisfactory to SBA
• A bank's settlement statement evidencing the purchase of the property
• The "pay-out sheets" maintained by the interim lender

• The 504 loan is typically secured with a subordinate lien on all project assets
• The SBA requires that the 504 loan must have a security interest in all project assets
• We can recognize existing prior liens in the case of building expansions and renovations
• Personal guarantees of all principals owning more than 20% of the company are required
• If the business is a start-up or the asset being financed is considered single purpose or the credit is unusually risky, additional collateral may be required
• Key Man life insurance is typically required unless there is a strong management succession plan
• Adequacy of collateral is a credit decision- additional collateral can be required by Capital Access Corporation-Kentucky or SBA

The interest rate on a SBA 504-loan is fixed for the life of the loan, either 10, 20 or 25 years.  Rates are determined each month and are based on cost the 10 year Treasury bill.  These rates are subject to change each month. 

There are fees associated with the SBA 504-loan. The fee is approximately 3% of what the SBA loan amount is.  For example, for a $1,000,000 project the bank would loan $500,000 (50%), the SBA loan would be $400,000 (40%) and the remaining 10% or $100,000 is your equity injection. In this case, the SBA loan of $400,000 would have a fee equaling approximately $12,000. The SBA will add back the fee into the original $400,000 so that you will borrow $412,000. We do this so that you do not have to come up with added funds that you could use in running your business.

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