504 Equity Injection Requirements

searcher profile

April 28, 2023

by a searcher from University of South Carolina in Indianapolis, IN, USA

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,

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The $5 million cap is for total SBA exposure to one borrower. Every dollar borrowed under an SBA 7A loan counts against that cap. When you do an SBA 504 loan, the dollars are typically split with 50% on the Bank loan, 40% on the SBA 504 loan and the other 10% in equity. The 40% on the SBA 504 loan is what counts against your SBA 504 limit.

Depending on how much you plan to go over, some SBA 7A lenders will offer what is referred to as a Pari Passu product where they will do a second Bank loan that matches the terms of the SBA 7A loan but does not have the SBA 7A guarantee. Most Banks do not want to do a Pari Passu greater than $2 to $3 million, and the underwriting requirements are typically much more constringent with requirements of hitting a higher debt service coverage ratio, stronger personal guarantees, and sometimes the lender wanting to see more collateral. This may be an option to get over the $5 million limit.

You could also look to do the real estate via conventional Bank financing as well, but that is likely going to require a larger equity piece down. You can also do a lease with an option to give you the opportunity to execute later, and you can build some money going to principal with the lease to limit or eliminate a required down payment later.

Happy to discuss various financing options if you would like. I can be pinged here or directly at redacted Good luck.
commentor profile
Reply by a lender
from University of Missouri in St. Louis, MO, USA
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.
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