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504 Loan Structure
Wisconsin Business Development partners with lenders to provide up to 90% financing to businesses for the purchase of owner-occupied commercial real estate and equipment. The private lender may provide up to 50% of the project costs, WBD provides up to 40% of the eligible costs, while the borrower provides an equity injection of as little as 10%. In the chart below, if the business is a new business, is less than two years old, or if the property is designated a special purpose structure, the borrower's contribution must increase accordingly.
| Existing Business | Start-up or special purpose |
Start-up and special purpose |
|
| Bank | 50% | 50% | 50% |
| WBD | 40% | 35% | 30% |
| Borrower* | 10% | 15% | 20% |
| Total | 100% | 100% | 100% |
*Additional borrower contribution may be required.
Lender
A bank, credit union, or other non-bank lender makes a commercial loan, typically 50% of total project costs, which is secured by a first mortgage.
Wisconsin Business Development
WBD makes a SBA-guaranteed loan of up to 40% of project costs, plus SBA loan fees, and is secured by a second mortgage. The total loan amount depends on the type of business and project.
Borrower
Borrower pays 10% of project costs using cash, equity in the land or building, and/or prepaid project-related expenses. Equity of 15-20% is required for start-up businesses and purchase of single-use properties such as hotels.
| Sample Project Cost | Private Lender | SBA 504 | Borrower's Contribution | Total |
| $ of Funding | $625,000 | $500,000 | $125,000 | $1,250,000 |
| % of Participation | 50% | 40% | 10% | 100% |
| Interest Rate | Variable or Fixed | Fixed | n/a | |
| Real Estate Term | 10+ years | 20 years | n/a | |
| Equipment Terms | 7 years | 10 years | n/a |
| Use of Funds | Source of Funds | Percentage | ||
| Land | $180,000 | Bank | $625,000 | 50% |
| Building Construction | $930,000 | *504 | $500,000 | 40% |
| Machinery | $80,000 | *Equity | $125,000 | 10% |
| Soft Costs | $60,000 | |||
| Total | $1,250,000 | Total | $1,250,000 | 100% |
* Participation is reduced and borrower's contribution is increased if the project is a 'start-up' business or a 'special purpose' business. If either of these classifications exist, the 504 is reduced to a 35% participation. If both exist, the 504 participation is reduced to 30%.
Collateral:
The 504 loan is typically secured with a subordinate lien on project assets. The Small Business Administration requires that the 504 loan must have a security interest in all project assets. We can recognize existing prior liens in the case of building expansions and renovations.
Personal guaranatees of all principals owning more than 20% of the company are required. If the business is a start-up or the asset being financed is considered single purpose or the credit is unusually risky, additional collateral may be required. Key Man life insurance is typically required unless there is a strong management succession.
