SBA 504 Program Outline

PURPOSE: To provide existing, viable small businesses with long-term below market rate financing for the acquisition of land and building, machinery and equipment, construction and renovation which results in the creation of new full time job opportunities.

THE MID-ATLANTIC BUSINESS FINANCE COMPANY

Mid-Atlantic Business Finance Company, historically the largest U.S. Small Business Administration lender in Maryland, is a private, non-profit corporation certified by the U.S. Small Business Administration (SBA) in May 1982 to serve a 23 county area in the State of Maryland and Baltimore City. In October 1997, Mid-Atlantic was certified to serve Kent and Sussex Counties, Delaware. SBA further increased Mid-Atlantic’s territory in 2005 to include Northern Virginia, Washington, District of Columbia and Pennsylvania.

Our new service areas in Virginia include the counties of Accomack, Arlington, Fairfax, Loudon, Northampton, and Prince William and in Pennsylvania the counties of Bucks, Chester, Delaware, Lancaster, Montgomery, Philadelphia and York.

Mid-Atlantic was created to provide existing, viable small businesses with long-term, below-market, fixed rate financing for the acquisition of real estate and equipment, for the renovation of existing buildings and for new construction resulting in the creation of new jobs. Small businesses that are creditworthy and able to take on additional debt are eligible. Financing is arranged through Mid-Atlantic’s authorization to sell debentures with the SBA guaranty for up to 40% of a project.

I. MAXIMUM AMOUNT

Up to 40% of eligible project cost, with a $1,500,000 debenture maximum (up to $2 Million is available if certain "public policy" goals are met). For small manufacturers, up to $4,000,000 is available. Total project size is unlimited.

II. USE OF PROCEEDS

Fixed asset acquisition includes:

• Purchase of land.
• Building purchase or permanent financing of a constructed building.
• Modernization, renovation, restoration of a building including leasehold improvements.
• Purchase of machinery and equipment which has a minimum useful life of 10 years.
• 10% contingency on a construction project.
• 0ther attendant soft costs such as accountants, engineers, appraisers, construction period interest, etc.

Ill. RATE OF INTEREST

The rate is determined by market at the sale of participation in a pool of government guaranteed securities (40% of the project). The rate is fixed for the term of the SBA/Mid-Atlantic Loan. Market rates are allowed on the private lending portion (50% of project).

A. TERM: Maturities of 10 and 20 years are available on the 504 debenture, depending on the useful life of assets and the term of the private lending participation. A minimum of 10 years is required from the private lender on real estate financing and 7 years on machinery and equipment.

B. COLLATERAL: Second mortgage and/or lien on assets purchased with proceeds of 504 loan. SBA may, at its discretion, look to collateral outside of the project when it is deemed necessary and appropriate.

C. PERSONAL GUARANTIES: Personal guaranties of the principals (ownership of 20% or more) are required. Corporate guaranties are also required.

D. DOWN PAYMENT: The small business concern must provide at least 10% of the project cost as equity or subordinated debt.

E. TYPICAL STRUCTURE:

• 50% first mortgage from private lender.
• 40% second mortgage from Mid-Atlantic (100% SBA guaranty).
• 10% equity or subordinate debt.

In the case of a start-up or special purpose building, the equity requirement is 15%. If the business is both a start up and special use building, the equity requirement is 20%.

F. REPAYMENT: Monthly level-debt installments of the SBA/Mid-Atlantic portion.

G. FEES: $2,000 deposit/screening fee is due upon Mid-Atlantic acceptance of package prior to submission to Mid-Atlantic Loan Review Committee. This fee is returned when Mid-Atlantic receives its final proceeds from the debenture sale.

H. CDC COMMITMENT FEE: 1.5% of the total portion of the project financed with two-thirds due upon acceptance of the SBA Authorization and Debenture Guaranty and one-third due from the proceeds of the debenture loan sale (added to the net amount of debenture), approximately 45 days after Mid-Atlantic's closing.

I. PARTICIPATION FEE: A fee to any lender of 1/2% of any mortgage senior to the 504 loan. The fee will be in the form of a check payable to Mid-Atlantic Business Finance Company which is due at closing.

J. OTHER FEES: Which are financed as part of the debenture.

• 1/4% Funding Fee.
• 1/2% (compounded) Underwriting Fee.
• SBA one time Loss Reserve Fee of 1/2%.
• $2,500 Closing Costs Fee, applicable to closing costs.

K. CONSTRUCTION FINANCING: A 504 Loan cannot be used for construction lending but represents a permanent takeout of 40% of the project costs after construction is completed. An interim loan from a regulated lending institution is required to undertake construction.

IV. ELIGIBLE BUSINESSES:

The applicant must be a for-profit corporation, partnership or proprietorship. The net worth of business must not exceed $7 Million, and the average net profit after tax must not exceed $2.5 Million (average over the last two years). In labor surplus areas, standards can be increased by 25%.

V. EMPLOYMENT IMPACT:

At least one (1) job must be created or retained for every $50,000 of 504 debenture funds issued. In labor surplus areas, Empowerment Zones, Enterprise Communities, and State designated zones, this requirement may be one job for every $75,000 in debenture funds. For loans to small manufacturers, the job requirement may be one per $100,000 in loan funds. The job requirement may be waived if the project fits one of the Public Policy Goals noted below.

VI. INELIGIBLE USES OF PROCEEDS:

• Working capital.
• Inventory.
• Debt consolidation or repayment.
• Refinancing.

VII. INELIGIBLE BUSINESSES:

• Not-For-Profit Corporations.
• Lending Institutions.
• Gambling concerns.
• Amusement Parks.

VIII. OTHER GUIDELINES:

In 1990, the SBA authorized a new debenture maximum for projects that meet the new Public Policy Goals. A loan of up to $2 million can be made and the job creation requirement can be waived if one or more of these criteria is met:

1. Business District Revitalization: A project located within a business area of a community with a recognized  revitalization or redevelopment plan.

2. Expansion of Exports: The business must derive at least 10% of its revenue from export sales at the time of the project.

3 . Rural Development: Projects located in rural counties or in a metropolitan county with a resident population less than 50,000 and the SBA has determined such area to be rural.

4. Enhanced Economic Competition: A project business is engaged in advancement of technology, plant retooling (expansion or modernization of manufacturing facilities), conversion to robotics or competition with imports.

5. Changes Necessitated by Federal Budget Cutbacks: A project in which a business is locating or expanding in an area impacted by Federal budget cutbacks, such as facility closing or cutbacks in defense related industries.

6. Business Restructuring Arising from Federally Mandated Standards of Policies: A project which affects the environment or the safety and health of employees, such as the installation of pollution control equipment, removal/encapsulation of asbestos, etc.

7. Expansion of Minority Business Development: Loans to Minority-owned firms. The ownership and management by the minority must be over 50%.

8. Women-owned Business: Loans to Women-owned businesses. The ownership and management by the minority must be over 50%.

9. Veteran-owned Business. Loans to businesses in which the majority ownership and manager received an honorable discharge from his or her military service. The owner/manager must hold a majority interest in the business and manage on a daily basis.

The 504 Program is not designed for use by developers or speculators. The small businesses must occupy at least 51% of the building being purchased or renovated immediately upon acquisition and/or completion of renovations. If constructing any new building, the small business concern must occupy at least 60% of the space upon completion of construction and may lease out no more than 20% of the building to another entity for long term use. However, projections must indicate that the small business concern will need some of the leased space within ten (10) years.

Appraisal requirements follow industry standards and are covered under the "Appraisal Requirements" section.

IV. APPLICATION PROCESS:

Compliance with Mid-Atlantic's environmental assessment policies is required. A survey in compliance with title insurance policy is required.

If interested, a business should call Mid-Atlantic Business Finance Company. Generally, a summary of cost estimates and two years of financial statements should be available to discuss eligibility of the small business for the 504 program.

REPURCHASE PREMIUM

504 financing includes a repurchase premium should the loan be prepaid during the first half of the term. The repurchase price shall be an amount equal to the outstanding principal balance of the debenture, plus interest accrued and unpaid thereon to the repurchase date, plus a repurchase premium, if any, determined as follows:

EXAMPLE 1: 20 Year Term ($100,000 Debenture at 7.5%)

EXAMPLE 2: 10 Year Term ($100,000 Debenture at 7.5%)

'I'he loan may be eligible for assumption by a creditworthy buyer if pre-approved by the SBA.

EXAMPLE OF 504 FUNDING FEES:

CDC (MID-ATLANTIC) FEE:

A. Deposit/Screening Fee: $2,000 due when Mid-Atlantic accepts package for processing--refundable if Board or SBA rejects application, less processing charges.

B. Two-thirds of CDC Fee: ($4,000 in example) at issuance of SBA/CDC commitment--considered earned at issuance and non-refundable.

C. One-third of CDC Fee: ($2,000 in example) from proceeds of debenture sale.

D. Refund of $2,000 deposit and overage ($854 in example) after debenture sale.

 

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