By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
Understanding the basics of SBA 504 loan eligibility can be better thought of in two categories. First is the eligibility with the SBA and second is the eligibility with the bank that funds the first lien position conventional loan.
Of the two, meeting the banks underwriting standards is more difficult and where most of the underwriting time goes into. For example, it is common that a borrower would be eligible/approved per the SBA/CDC but declined by the funding bank.
SBA 504 Loan Eligibility – Understanding The First Lien Position Loan
Banks underwrite the 504 loan like they do all commercial real estate loans. They are concerned with cash flow, credit, experience, liquidity, trends, etc. They want to know – does the business make enough money to cover all their expenses including the proposed loan and still have a little left over? (Also referred to as debt service coverage ratio’s, cash flow is really the most important underwriting consideration.) Is the long term outlook for the business positive? Does the borrower really have enough experience to run the business? Is the business owner honorable and pays debts as agreed?
Again, the bank that funds the first lien position loan is more careful and conservative than the SBA. Borrowers should normally find a bank that will approve their loan first, than go out and find a CDC that will fund the second loan (Also, it’s wise to let the bank pick the CDC as they will know the better CDC in your market).
CDC/SBA Guidelines On the Second Lien Loan
There are basic eligibility standards with the SBA and here’s most of them:
- Your business has to be for profit.
- Borrower can not be late on any bills within the last 12 months.
- Proceeds of the loan can only be used to finance fixed assets, such as commercial real estate or equipment. You can use the loan to construct or modernize buildings. You cannot finance working capital, goodwill or other debt consolidation for example.
- Your business has to occupy at least 51% of the subject property (Keep in mind that common areas can be counted.)
- You have to come in with at least 10% for the equity injection.
- You Debt Coverage Ratio normally has to be greater than 1.25.
- Tangible net worth of the business can not exceed $15 million.
- Maximum loan amount is $13,000,000.
There’s a lot of verbiage about public policy goals including job creation, lending to women and minorities, redeveloping business districts but the reality is that these initiatives do not really come into play on your average transaction.