Frequently Asked Questions
 

1.  What businesses are eligible for SBA 504 loans?

Dakota BUSINESS Finance, through the U.S. Small business Administration (SBA), can provide financing for a wide range of businesses.  To be eligible, a business must be operated for-profit and if purchasing a building, the small business must occupy at least 51% of the building.  Loans cannot be made to businesses engaged in speculation or investment.

2.  How does the SBA 504 loan program work?

The 504 program is designed to enable small businesses to create and retain jobs.  Typically a 504 project includes the following:

• A loan secured with a senior lien from a private-sector lender (bank) covering up to 50 percent of the project cost
• A second loan with a junior lien from SBA / Dakota BUSINESS Finance (Certified Development Company) covering up to 40 percent of the project cost
• A contribution of at least 10 percent equity by the borrower.  New businesses or special purpose projects (defined below) require more equity from the borrower.

3.  What types of projects are eligible?

The 504 loan program provides fixed rate financing for long-term, fixed assets.  Eligible project costs include:

• Purchase of land, including existing buildings, grading, street improvements, utilities, parking lots, and landscaping
• Construct buildings
• Buy or remodel buildings
• Furniture, fixtures and equipment
• Soft costs (architect and engineer fees, appraisal, soils, points, fees, interest)
• Land improvements
• Leasehold improvements
• Refinancing (limited) of existing debt on long-term fixed assets as part of an eligible expansion project

4.  What cannot be financed through the SBA 504 Program?

Project costs that are not associated with long-term fixed assets are not eligible.  Examples include:

• Working capital
• Refinancing (except for short-term financing on land or financing for long-term assets refinanced as part of an expansion project)
• Debt consolidation
• Accounts receivable financing
• Furniture, fixtures and equipment with a useful life of less than 10 years (unless a minor portion of a larger eligible SBA 504 project).
• Inventory
• Construction financing
• Franchising fees

As an alternative, these types of project costs may be financed through the South Eastern Development Foundation or another third-party lender.

5.  What is the maximum loan amount?

The maximum loan amount for the SBA 504 portion of the loan (up to 40% of the total project) is:

• $1.5 million for typical projects
• $2 million for "special" projects defined as either rural (outside of Sioux Falls), woman-owned, minority-owned, veteran-owned, federal cutbacks, export, modernization projects, use of sustainable building design, or projects located in a redevelopment area. 
• $4 million if the loan is to a small manufacturer, will result in a 10% reduction in energy consumption for the applicant, or utilizes renewable energy sources (solar panels, geothermal, wind tower) as part of the building project. 

As a general rule of thumb, if the total project is $10,000,000 or less, it may qualify for participation in the 504 loan program.

6.  What is the minimum loan amount?

The smallest debenture that Dakota BUSINESS Finance is able to issue is $25,000.  Assuming that this is 40% of the project cost, the smallest total project size that can be financed through the 504 program is approximately $60,000.

7.  What will the term and interest rate be on the 504 loan?

Loans are made for either 10 or 20 years.  The 504 debentures are sold on the secondary market and interest rates are set at a fixed rate at the time the loan is funded.  Interest rates are generally at or below the market rate. For current and historical SBA 504 rates click here.

8.  What fees are involved?

Fees total approximately 3% of the debenture and are financed with the loan.  This fee includes a CDC fee of 1.5%, closing costs and an underwriting fee. There are no "out-of-pocket" costs for a borrower on the CDC portion of the loan.  Dakota BBUSINESS Finance's fees are built into the 504 debenture and are financed 100% by SBA over the 10- or 20-year period.

9.  Are there any pre-payment penalties?

There is a pre-payment penalty on the 504 loan based on a sliding scale for the first 10 years on a 20-year debenture and the first 5 years on a 10-year debenture.  Terms on the first mortgage are negotiated directly with the participating lender.

10.  What type of collateral is expected to be pledged?

Generally the project assets being financed are used as collateral.  Personal guaranties are required from all principal owners of the business (with ownership of 20% or more and officers).  Liens on personal assets of the principals may also be required.

11.  What does the SBA look for in a loan applicant?

Generally, SBA is looking for good character, management expertise, and the commitment necessary for success.  Adequate equity investment by the borrower in the business and sufficient funds to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase).  Also, the ability to repay the loan on-time from the historical or projected operating cash flow is essential.  A feasible business plan is a must.

12.  What government paperwork or forms will eventually be needed?

Dakota BUSINESS Finance will work with borrowers to complete the SBA loan application and other forms that need to be submitted to Dakota BUSINESS Finance and SBA.  Contact us to set up a meeting to receive technical assistance.

13.  Are there special provisions for new businesses?

New businesses are defined as those that are less than two years old.  New businesses are required to make a 15% down payment (vs. 10% in a typical 504 program loan).  The CDC (Dakota BUSINESS Finance) can only finance 35% of the project while the bank must provide 50% of the financing.

14.  What is the definition of the "single purpose" building?

A "single purpose" building is one that could not be easily adapted for other general purposes without incurring significant expenses.  Examples of single purpose buildings or projects include bowling alleys, marinas, hotels/motels, theaters, convenience stores and gas stations, etc.  In the case where the 504 program is being used to finance a "single purpose" building, the borrower has a mandatory 15% down payment. The CDC (Dakota BUSINESS Finance) can only cover 35% of the loan while the bank must stay at 50%.  If the business is both new and for a "single purpose" building, the borrower's contribution must be 20% of the loan (Dakota BUSINESS Finance drops to 30%, and the bank must stay at 50%).

For a list of "single purpose" buildings, click here.

15.  What are the requirements for refinancing existing debt?

The SBA 504 Program allows for limited refinancing of existing debt as part of a new eligible SBA 504 project.  The refinanced debt must have been for long-term fixed assets that would normally have qualified for the SBA 504 program had the program been used originally to finance the assets.  The refinancing must be part of a new SBA 504 project (purchase of long-term equipment, purchase of an existing building, expansion or renovation of an existing building, and/or construction of a new building).  The amount of debt refinanced is limited to 50% of the new SBA 504 project.