Financing Structure

The SBA 504 program serves both the Business Banking segment as well as the Middle Market segment.

Model 504 Financing Structure

Total Project Cost $1,000,000

 Source Amount %
Private Sector First Mortgage/Lien $500,000 50%
SBA 504 NET Debenture Proceeds $400,000 40%
Borrower's Equity (minimum) $100,000 10%
Total Project Cost $1,000,000 100%

Equity or Local Injection (Structure Guidelines)

  • Minimum is usually 10%
  • Limited use or start up 15% (or both 20%)
  • In the form of cash or equity in real estate
  • Usually required of the buyer
  • May be a loan from CDC or other lender (rare); if secured it must be a subordinate to CDC/SBA, and private sector lender (Term should/must be same or longer)

CDC/ SBA (Structure Guidelines)

  • Maximum is usually 40% of eligible project costs
  • Takes a lien subordinate to the private sector lender on assets pledged as collateral for the loan
  • Can offer either 10 or 20 year terms (depending upon the assets financed)
  • Provides a fixed interest rate loan
  • CDC issues a debenture (bond) that is guaranteed 100% by SBA

Private Sector Participants (Structure Guidelines)

  • Usually a bank; must have experience at this type of lending.
  • May take the priority lien on assets pledged as collateral.
  • Must offer term of 10 years if debenture is 20 years (or 7 if debenture is 10 years)
  • May set rate and fees (legal and reasonable)
  • Their loan cannot be guaranteed by SBA

20 Year Debenture Pricing Model

10 year treasury 4.06%
+ Spread to investor 1.100%
 = Debenture Rate 5.160%
+ SBA subsidy cost 0.828%
+ CSA fee 0.100%
+ CDC Servicing fee 1.000%
 = Total 7.088%

Prepayment Penalty

  • No partial payments allowed
  • Loan is assumable and collateral can be substituted
  • Funds can be placed in escrow account to ensure repayment
  • Payment penalty is based on predetermined schedule, based upon the rate of the underlying (debenture) bond.

Credit Criteria

Repayment Ability

  • Based upon existing financial statements of the applicant. Can historical cash flow cover the additional debt?
  • Generally a cash flow coverage ratio of 1.25:1 or better is considered desirable.
  • Rental income can be considered if verifiable.


  • Second Mortgage (Trust Deed) on Real Property
  • Second lien on Personal Property (SBA would prefer a first lien on mixed use projects)
  • Personal Guaranty required of any 20% or more owner (of EPC and OC)

Secondary Collateral

 If conditions are not met, SBA must consider these alternatives;

  • Pledge of additional collateral including personal residence or other real property. (Inventory and accounts receivable not acceptable)
  • Borrower to inject more equity than statutorily required minimum
  • If borrower is unable or unwilling to provide additional collateral, loan may be declined

    Other Issues
  • Life Insurance may be required if management does not display appropriate depth and succession.
  • Environmental Issues: Environmental Questionnaire, Transaction Screen Analysis, or Phase 1 and 2 necessity is determined by lender and CDC.
  • Appraisals: Usually addressed to Lender, SBA and CDC. Ordered by Senior Lien holder.

Responsibilities of the CDC

CDC Responsibilities at Closing

  • Obtain proof that Project is complete and in accordance with plans, specs, and appraisal.
  • Architect  and/or Appraiser
  • Government Entities (Certificate of Occupancy)
  • Obtain assurance that project is in compliance with Earthquake codes, Building codes, and Zoning Compliance
  • Obtain proof that M&E and F&F have been purchased in accordance with authorization. (model and serial numbers)
  • Obtain evidence of Hazard, Life, and Flood Insurance as appropriate
  • Obtain evidence of Borrower's Injection of required equity.
  • Obtain evidence that interim loan is fully disbursed, used in accordance with authorization and that no material liens exist.
  • Verify borrower occupancy
  • Verify that Borrower has not suffered an Adverse Change in Financial condition.
  • Verify tax returns with IRS, Good Standing of Corporation, etc as listed in authorization.

CDC Servicing Responsibilities

  • Routine Regular Servicing Activities
  • Hazard Insurance Coverage on Collateral Property
  • Payment of annual property taxes
  • Review of Business Financial Condition
  • Job Creation and Economic Development Impact
  • Renewal of UCC Liens as Dictated by State Law (usually every 5 years)
  • Routine Field Visits
  • Borrower Compliance with other Loan Covenants
  • Work with a Central Servicing Agency to collect monthly payments
  • Work with borrower and SBA to respond to special servicing requests
  • Release of Collateral
  • Subordination or Substitution of collateral
  • Assumption

CDC Roles in Liquidation

  • Work with borrower and SBA in cases of troubled loans; Delinquent Status and Liquidation
  • Workouts, Deferrals, and Other remedies
  • Bankruptcy