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
177 views
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

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

Examples of self-funded searcher websites

What are market terms for Seller Notes?

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Sorry, but you are a broker's worst nightmare ... and how to fix it

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.