Frequently Asked Questions
What is a 504 Loan?
The 504 program enables growing businesses to secure long-term, fixed-rate financing for major fixed assets through SomerCor 504, Inc. The program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, such as land, buildings, machinery and equipment, or the building, modernizing, renovating or restoring of facilities.
Why the 504 program?
SomerCor raises the money for its share of the project cost through the monthly sale of bonds on the Capital market. This bond is 100% guaranteed by the full faith and backing of the U.S. Small Business Administration, which makes it an attractive instrument to potential buyers in the public securities market. In return for its share of the project financing (up to 40%), SomerCor takes a second collateral position (second mortgage) on the project assets for 20 years, at an interest rate fixed for the life of the loan and set by the market in the month that the bond is actually sold.
How much can I borrow under the 504 program?
Under the 504 program a project can be any size, but the SomerCor portion of the loan package is limited to 40 percent of the project cost, up to a total of $1.5 million, $2 million, or $4 million, depending on the exact nature of the project.
While there are no limits to the project size, typical projects range in size from $300,000 to $5 million.
What can loan proceeds finance?
Loan proceeds generally may be used for the following fixed-asset projects:
- Purchasing land and existing buildings, and making improvements such as grading, utilities, parking lots and landscaping
- Constructing, modernizing, renovating or converting existing facilities
- Purchasing machinery and equipment that has a useful life of 10 years or more
- Furniture and fixtures directly related to the project
- Soft costs such as appraisals, environmental studies, title insurance fees, architect fees, engineering fees, and related legal and accounting fees
What are the typical finance terms?
With the 504 loan, the business gets an attractive 20-year fixed rate for real estate loans and a 10-year fixed rate for equipment loans. The actual interest rate is based on the 10-year and 5-year treasuries respectively.
What are the eligibility requirements for a business?
An eligible business must be a for-profit corporation, partnership or proprietorship with a net worth (including any affiliates) of $7 million or less. Average net profits after taxes cannot exceed $2.5 million per year for the previous two years.
Are there any bottom-line benefits for bank lenders?
There are a number of incentives for lenders to use SomerCor’s 504 Program.
- Reduce risk by financing a smaller portion of the project while.
- Maintaining a first-lien position on 100 percent of the assets being financed.
- Retain commercial-account relationships while participating in the long-term financing.
- Comply with the Community Reinvestment Act and extend legal lending limits.
- Generate new business for years to come.
- Broaden the community’s tax base.
- Stimulate the local economy through job creation and retention.
