SBA 504 loan program requirements
The U.S. Small Business Administration has a number of requirements for participants in the Section 504 loan program for major fixed assets.
Eligible businesses
Operate as a for-profit company.
Do business or propose to in the U.S. or its possessions.
Have a tangible net worth of less than $15 million and an average net income under $5 million after taxes for the preceding two years.
Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
Franchises are eligible except when a franchiser retains power to control operations to such an extent as to equate to an employment contract. The franchisee must have the right to profit from efforts of ownership.
Recreational facilities and clubs are eligible if the facilities are open to the general public. In membership-only situations, membership is not selectively denied or restricted to particular groups.
Farms and agricultural businesses are eligible. However, these applicants should first explore Farm Service Agency programs.
Fishing vessels are eligible. However, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service.
Medical facilities including hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are also eligible, provided they are licensed by the appropriate government agency and provide more than room and board.
An “eligible passive company,” a small entity that does not engage in regular and continuous business activity, must use loan proceeds to acquire or lease or improve or renovate, real or personal property that it leases to one or more operating companies for use in the operating company’s business.
Loans for change of ownership are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the development of the business or in preserving its existence.
Legal aliens are eligible, with consideration given to status as a resident or lawful temporary resident in determining the businesses’ degree of risk.
Applications will not be accepted from firms in which a principal is currently incarcerated, on probation or parole, or is a defendant in a criminal proceeding. Judgments are made on a case-by-case evaluation of the nature, frequency, timing of offenses and disposition of offenses. Fingerprint cards are required only when a felony offense is disclosed.
Ineligible businesses
Ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multisales distribution, gambling, investment or lending, or where the owner is on parole:
Real estate investment firms when the loan is used for investment purposes.
Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when the activity is not part of the regular activities of the business.
Dealers of rare coins and stamps.
Firms involved in lending activities, such as banks, finance companies, factors, leasing companies, insurance companies, and any other firm whose stock in trade is money.
Pyramid sales plans, where a participant’s primary incentive is based on sales made by an ever-increasing number of participants.
Firms involved in illegal activities.
Gambling activities, including any business whose principal activity is gambling. The rule does not restrict loans to businesses that obtain less than a third of their annual gross income from sale of official state lottery tickets under a state license, or legal gambling activities licensed and supervised by a state authority.
Charitable, religious or other nonprofit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives.
Borrower use of funds
Under the 504 program, proceeds must be used for an approved purpose, such as for financing fixed assets including real estate or equipment.
The SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed. If resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan.
The business must have the ability to repay the loan on time from projected operating cash flow.
