New Proposed Legislation Will Affect SBA Loans and Franchisees
We will analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default.
CDC loans bolster your business's usable capital. Keep reading to discover what SBA 504 loans are and what action you can take if you default.
Book a Consultation CallSmall business ownership is a dream of many people. What stops a lot of potential entrepreneurs from starting a business is the lack of access to funding. If you have not raised your own capital it can feel like an impossible feat to get a loan.
CDC Loan
The number of small businesses that open and close within one to five years speaks to the need for better funding options.
Having a business in a community development zone or being willing to open in one, could be the answer. The Small Business Administration offers government-backed Certified Development Company (CDC) Loans. You will need a decent credit score and the ability to provide a minimum of 10% for a down payment.
It may seem like a lot it but could propel your business in terms of growth.
Are you a small business owner looking for financing? Keep reading to learn more about SBA 504/CDC Loans and who qualifies?
The Small Business Administration (SBA) is a division of the federal government. On the surface, people believe its only purpose is to assist small business owners in securing government-backed funding. The agency is more multi-faceted than that.
Although they assist in securing loans geared towards starting, supporting, and expanding businesses, they offer other support. Business owners can also receive counseling services, learn how to secure government contracts, and receive relief after disasters.
Their loans typically require businesses to have been in operation for several years to demonstrate their creditworthiness. Owners also need to have a good credit score.
The SBA program is geared towards businesses that want to relocate or build in areas identified for community redevelopment. The loans are for the purchase of commercial real estate and equipment. It is a 90% funded loan that requires the remaining 10% come in a down-payment from the borrower.
A breakdown of the 90% in financing includes 50% from an approved financial institution and 40% from the CDC.
The business applying for the loan doesn't have to be located in the area but could be planning to relocate. The loan has job creation requirements that must be fulfilled by the borrower and/or the community development grant.
Let's take a closer look at the SBA 504 Loan.
SBA 504 loans are for businesses that have a net worth below $15 million. Your net profits for the past two years cannot be more than $5 million per year. As you can see, although this is a great opportunity, businesses applying for these loans must be well established and doing consistent business.
If your business is just starting you can still apply. The efforts to get approved will be a huge hurdle to get over. Having exceptional credit, a strong business plan, and financial records to support your ability to repay the loan, increase your chances of being approved.
Regardless of how long you have been in business, you need to be keeping good records and planning for future needs. Obtaining an SBA loan is not a quick process. Your documents must be in order to get started on the process.
There are other requirements that will be spelled out in the loan documents.
The money obtained from 504 CDC loans includes purchasing real estate for your business or to build a new structure. The money can also get used to rehab an existing building. You can also use the money for upgrades to your property such as streetscapes, landscaping, and even adding a parking structure.
The money cannot get used for working capital, nor can it get used to repay existing debt.
The CDC will have specific requirements which include job creation. The jobs most likely will need to be permanent positions that have a set financial impact on the community.
Hiring temporary employees for construction projects, typically do not count as job creation. Therefore, will not meet the requirements of the loan.
People often do a comparison of SBA 7a vs 504 loans. These are two very distinct loans. One difference is in the amount of money that can be borrowed.
With an SBA 7a loan, the minimum is $50,000 and the maximum is $5 million dollars. These loans do not have the same requirement uses as the 504 loan.
Because the SBA 504 Loan is for commercial real estate or equipment the amount you can borrow differs. The minimum is $125,000 and the maximum is $20 million.
The repayment terms for an SBA 504 loan is dependent upon the purpose of the loan. If you are borrowing the money to buy real estate you will have 20 years to repay the loan.
The interest rates for the loan are at a fixed rate once you close. It is important to pay close attention to what is happening in the markets during the loan process. Fluctuations can significantly impact the calculation of the CDC portion of the loan.
In cases where the money was used to buy equipment, the repayment term is reduced to 10 years.
Like with most loans, to make a major purchase, the item you are buying or investing in becomes the collateral for the loan. The 504 program is no different. If you default on the loan the lenders will need some reassurance they can recoup their losses.
Although the loan is partially guaranteed by the SBA, it does require personal commitments from principal owners in the company. This means if the company defaults the owners can be held personally liable for repayment.
Several scenarios could play out if you default on a 504 loan. First, the lender will foreclose on the real estate securing the loan. What happens from there depends on how much of the debt the foreclosure covers. In many cases the foreclosure will cover the lender's liability but not the CDC/SBA's position. At that point the CDC/SBA will come to you as the personal guarantor to pay the deficiency. An offer in compromise, wherein you agree to pay a percentage of the debt, may be feasible. If you pledged your house or other personal real estate as collateral, the situation becomes much more complicated. The CDC/SBA could foreclose on your real estate and any compromise becomes much more expensive. Alternatively, you could work out a payment plan to pay the deficiency back over time in full.
CDC Loans have helped many small businesses to expand within their communities. Whether you are looking to build in a community development zone or provide your services, an SBA 504 Loan can get you the capital needed.
However, if a default occurs and the CDC/SBA look to you to pay a large debt, it is time to obtain assertive, experienced legal counsel.
Click here for a case evaluation.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
The client personally guaranteed an SBA 504 loan balance of $375,000. Debt had been cross-referred to the Treasury at the time we got involved with the case. We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
Small business and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency. After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.
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