Can a startup get an SBA 504 loan?
Short answer
Yes, but with a higher contribution. A business operating 2 years or less counts as new. The usual structure is then 50% third party lender, 35% CDC debenture, 15% borrower. Source: SOP 50 10 8.1, Sec. C, Ch. 1, Para. B.
In this answer, CDC means Certified Development Company.
Yes. In the 504 program, SBA's term for a startup is New Business. SOP 50 10 8.1 defines one as operating for 2 years or less when the loan is approved (App. 3, p. 297).
The structure changes
- New business: 50% third party lender, 35% CDC debenture, 15% borrower.
- New business with a limited or special purpose property: 50% third party lender, 30% CDC debenture, 20% borrower.
Source: Sec. C, Ch. 1, Para. B (p. 221).
What the CDC needs
A new business has little history, so the Certified Development Company (CDC) relies on projections (Sec. C, Ch. 1, Para. E.1.d).
- At least 2 years of projections, with assumptions the CDC must justify.
- A monthly cash flow analysis for the first 12 months or 3 months past breakeven, whichever is longer (Para. F.2).
- A pro forma balance sheet with assumptions (Para. F.2).
- If projections show repayment in Year 2 but not Year 1, enough liquidity to cover the shortfall.
What new businesses cannot use
- Debt refinance without expansion requires two full years of operation (Para. C.10).
- The 10% energy reduction category excludes new businesses (Para. A.2).
How 7(a) differs
A 7(a) start-up must inject at least 10% of total project costs. For that test, a start-up is a business in operation for 1 year or less (Sec. B, Ch. 1, Para. C, p. 118). The 504 program draws its line at 2 years.
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