How do SBA 504 loans work for Ohio small businesses?

What it is

An SBA 504 loan is a government-backed loan for buying or building owner-occupied commercial real estate or major long-life equipment, according to Axiant Partners. The U.S. Small Business Administration (SBA) says the program provides "long-term, fixed rate financing for major fixed assets that promote business growth and job creation."

"Fixed rate" means the interest rate stays the same for the life of the loan. "Fixed assets" are big, long-lasting purchases like a building or heavy machinery.

How it works

The SBA says 504 loans are available exclusively through Certified Development Companies (CDCs). Axiant Partners describes a three-part structure:

• A bank lends about 50%.
• A CDC lends about 40% through an SBA-backed debenture at a long-term fixed rate.
• The business puts down about 10%.

LendingTree says the down payment typically runs 10% to 20%, depending on factors such as the loan balance, time in business, revenue history and business credit score.

The Ohio Statewide Development Corporation (OSDC) says on its website that terms are 10, 20 or 25 years, with a low, fixed rate for the entire term.

An example

This is a hypothetical with round numbers. Say a company buys a $1,000,000 building. Using Axiant's approximate split, the bank would lend about $500,000, the CDC about $400,000, and the company would put in about $100,000. Actual splits and terms vary, and a lender or CDC sets them.

Who qualifies

The SBA says a business must be an operating business, operate for profit, be located in the U.S., be small under SBA size requirements and not be an ineligible type of business.

OSDC's page adds specifics on size and occupancy: average net income of $5 million or less and tangible net worth of $15 million or less. The business must also occupy 51% of the building, or 60% for new construction.

How much can you borrow?

The sources differ slightly. The SBA says the maximum loan amount is $5.5 million. OSDC lists loans up to $5 million, or $5.5 million for manufacturing. Ask a CDC which limit applies to your project.

Where Ohio businesses can start

OSDC is an Ohio organization that promotes the 504 loan on its site. The SBA's list of Certified Development Companies, an older version of which is still online, includes Alloy Development Co., Inc. at 1776 Mentor Ave., Suite 110, Cincinnati, OH 45212. Addresses and listings change, so check the SBA's current list.

What to watch out for

The 504 program is for fixed assets, not a general-purpose loan. The sources give little detail on how it compares with other SBA loans or conventional bank loans, so compare terms, fees and rates directly with lenders. Ask a lawyer or accountant before you sign, since this is not legal, tax or investment advice. Confirm all details on the SBA's official 504 page at sba.gov, and note that this guide does not promise anyone will qualify.