504 Equity Injection Requirements

by a searcher from University of South Carolina

1 year ago

I'm buying a business with a 7(a) loan then buying the real estate afterwards. The 7(a) loan is hitting the 5m cap so I can't do it in the same transaction. 

With the 504 loan, is it possible to put in 5% equity and have the seller put in 5% on full standby? That's what I'm doing with the 7(a), but I'm not sure if that's allowed with the 504. 

Thanks,

1 like
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10 comments

lender from University of Missouri - Columbia

Independent of the $5M cap, the seller being part of the loan on a 504 is much more flexible than the 7A. You would likely need 15% down under the 504 since you are doing an acquisition v. the typical 10% if you were an existing business today (Add another 5% if the property is special use) Seller financing can technically be ALL of the down payment on a 504 loan, although most banks and CDCs (SBA partner on a 504 loan) would likely require 5% down. So assuming you put 5% down, the 10% seller note can get you to the equity requirement. A couple of quirks on the 504 v. the 7A (and there is some different answers depending on which CDC your bank partners)
- the seller note does not have to be on standby in the 504. if the cash flow is there, you can pay them right away
- the seller note can be for any term that works for you and them if they do not take a tertiary lien on the building (bank will be in first and CDC/SBA will be in second).
- If they do want to take a lien on the building, then they have to take a term that matches the SBA = 25 years. Many sellers will find this prohibitive but that is required if they take a lien.

1 year ago | like reply | 1 like

searcher from Parsons School of Design

Great question. Excited to follow this thread for answers ;-(

1 year ago | like reply | 0 likes

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