The government-operated SBA 504 program provides funding to small and start-up businesses in order for them to purchase or expand property. These loans provide the borrower with up to 90 percent financing, 25-year loan amortizations, fixed-rate interest rates, and no balloon payments. 2012 was a record year for SBA 504 loans, with 9,741 loans approved for a total amount of over $15 billion.

What is an SBA loan?

The SBA 504 loans are restricted to a specific set of purposes that both borrower and lender should familiarize themselves with:

• Purchase of existing buildings
• Purchase of land
• Purchase of long-term machinery
• Land improvements, such as grading, paving streets, adding utilities, or landscaping
• Construction of new facilities
• Refinancing debt, in conjunction with an expansion through new or renovated facilities or equipment

The loan-refinance provision which was available last year as part of the SBA 504 expired last fall, so it is important to note that these loans can no longer be used for working capital, debt repayment, or refinancing without an expansion component.

What are the SBA requirements?

The SBA program maintains specific requirements that borrowers must meet in order to be eligible to apply for a 504 loan. A borrower’s business must be for-profit with a net worth of no more than $15 million and an average net income of $5 million or less for at least the last two years. The business must also create or retain at least one job for every $65,000 guaranteed by the loan.

The Catch 22 and how to escape from it.

So how can a hard money lender like Montegra help with this? The SBA 504 program prefers to lend to businesses with an established history, but for a start-up company, this can be a catch-22. It is impossible to have an operating history for a business without a facility out of which to operate but it may not be possible to get an SBA loan without 12 to 18 months of operating business history. A bridge loan can help a new business owner to purchase the necessary property to open their doors and can give them the initial funding necessary to eventually allow them to apply for a SBA 504 loan once they have a 12 to 18 month operating history.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.