What is the 504?
The 504 is a loan program that enables growing businesses to obtain long term, below market, fixed rate financing for fixed assets (real estate and equipment). The real estate can include land, buildings, renovations or new construction projects.
What is Wessex 504?
Wessex 504 Corporation is a non-profit company certified by the U.S. Small Business Administration to originate and service 504 loans. As an SBA Certified Development Company, Wessex 504 Corporation works with the Small Business Administration and lenders to deliver the 504 Loan Program to businesses. Wessex 504's objective is to assist healthy, growing businesses secure long term, below market, fixed rate financing for the acquisition of real estate or capital equipment. Wessex 504 handles the complete 504 loan process from the loan origination to loan closing to servicing over the life of the loan. Wessex 504 is committed to providing the highest level of service to our business clients and lending partners.
What are the benefits of the 504 loan to businesses?
Low down payment - The business owner puts only 10% down, borrowing up to 90% of the total financing needs, thus preserving valuable working capital for the business.
Long term financing - Repayment periods are often longer than conventional bank loans - 20 years fully amortized for real estate loans (10 years for equipment loans). The borrower's monthly loan payment is more affordable, improving cash flow.
Below-market, fixed interest rate -The below market, fixed interest rate protects against future rate fluctuations, providing low and predictable monthly payments.
What are the benefits to lenders?
The 504 loan program offers many benefits to lenders. They include:
- With 504, banks have the first lien position and typically a 50% loan-to-value ratio, thus minimizing collateral risk.
- The 504 program can help banks with management of overall lending limits and industry exposure.
- With 504, banks can lend to more customers. By reducing lending exposure on each loan, banks can reach more customers, while simultaneously reducing default risk.
- The 504 program can help banks gain new customers. Because the 504 program is designed to help healthy growing businesses purchase owner occupied real estate, a bank can establish a solid, new, long term customer by offering the 504 loan option.
- There is an active secondary market for 504 first mortgage loans, so a bank could reduce their exposure to zero, while retaining the customer's primary banking relationship.
- The 504 offers banks the opportunity to strengthen core earnings. The pricing of the bank's portion of the loan is at its discretion. In addition, the customer only has to put 10% down on the project, which means more of the customer's funds remain on deposit, enhancing earnings.
- Banks that participate in SBA 504 loans are eligible for Community Reinvestment Act (CRA) credit on certain projects.
Is my business eligible?
Eligibility requirements for businesses:
- Building must be owner operated
- Business must be for profit
- Business must have a net worth less than $15 million and have an average after tax profit for the last two years below $5 million or the business must meet the employee test (for example, most manufacturers with less than 500 employees qualify.)
- When purchasing an existing building, the business must occupy at least 51% of the building, 60% occupancy in a new construction project
Ineligible businesses:
- Speculative real estate investment businesses
- Businesses that earn a significant portion of their revenue from speculative operations
- Exclusive clubs
- Businesses with more than 1/3 of their revenue from legal gambling
- Offshore facilities
- Banks
- Insurance companies (Independent insurance companies are eligible)
- Lobbyists
Are there occupancy requirements?
Yes. When purchasing an existing building, the business must occupy at least 51% of building, 60% occupancy in a new construction project.
What is the maximum project size for a 504 loan?
There is no limit to the total project size. The Wessex 504 portion (40% of total project) of the loan has a maximum of $5 million ($5.5 million for manufacturers and energy loans). This means a total project as large as $12.5 million still realizes the maximum benefit, with Wessex 504 still at 40% of the total project. Larger projects still work. The bank just takes on a larger percentage of the total project as the total project increases.