Guest Feature by Joe Kammermeier, Vice President-MBFC

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As a business owner you generate a higher rate of return by investing your precious working capital in your business rather than in your long-term fixed assets, such as real estate and equipment. So, what’s the best way to finance your long-term fixed assets? Consider an SBA 504 loan, which requires minimum borrower equity. Here’s how it works: On most transactions your lender will finance 50% of the total project; the SBA, via a Certified Development Corporation (CDC), will finance up to 40%; and you, the business owner, will provide an equity injection of at least 10%. If the property is special purpose and/or the business is a start-up, the owner’s equity injection will increase, thus reducing the SBA’s portion.In the end you will have two loans; one with your bank of which the term, rate and fees associated with this loan are negotiated between you and your lender. Your bank’s loan will be secured with a first lien position on the assets being financed. The second loan will be provided by the SBA and administered through a CDC. It will have a fully amortized term of either 10 or 20 years depending on whether equipment or real estate is being financed and will have a low fixed rate of interest. What that means to you is there are no call dates, balloons and never a need to refinance. The SBA will take a subordinated lien behind your bank. The advantages to you are two-fold: low borrower equity injection and long-term fixed financing!

There is no upper limit to the size of the total project cost; however, the maximum SBA/CDC loan is $5.5 million.

Most costs directly related to the project are eligible to be financed with the SBA 504 loan program. Project costs can include, but are not limited to, land, building, construction, equipment, debt refinance and professional fees.

For a small business concern to be eligible for this program they must be a for-profit business, located in the United States, create and/or retain jobs or meet public policy objectives. The subject business, and any affiliated businesses, must fall within certain size standards set by the SBA. The maximum tangible net worth is $15 million and the maximum two-year average net income (after tax) must not exceed $5 million. Most small businesses qualify for the SBA 504 loan program.

As Minnesota’s first statewide Certified Development Company,Minnesota Business Finance Corporation (MBFC) is a private not-for-profit 501 (c) (3) organization licensed by the U.S. Small Business Administration, authorized to originate and service SBA 504 loans throughout Minnesota.

Featured on Fidelity Bank November Newsletter:

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