Ask the Experts 504 Q & A

Q. - Can the borrower's equity contribution be borrowed? Answer

A. - Yes, according to the SOP, "The borrower's injection may be in the form of either equity or borrowed funds (with terms acceptable to SBA). The adequacy of the borrower's equity position is, as always, a credit matter."

Q. If the equity contribution is borrowed, are there any required terms and conditions?

A. If the contribution is borrowed, the loan must meet the following conditions:

1. the interest rate is reasonable;
2. any lien on the Project assets is subordinate to the liens securing the 504 loan; and
3. the loan will not be repaid at a faster rate than the 504 loan.

Q. Does this mean that if a borrower utilizes a Home Equity Line of Credit (HELOC) that its term must at least the length of the 504 loan?

A. No, because a HELOC is a personal loan (not a business loan) to the guarantors on collateral unrelated to the project property, then its acceptability as a portion of the equity injection is solely a credit decision that confirms that the interest rate is reasonable and the terms and conditions are not so restrictive that they will impact the borrower's ability to repay the SBA 504 loan. This same principal applies to other personal loans obtained by the guarantors in order to provide adequate equity contribution. These loans must be unrelated to the project property and must demonstrate no adverse effect upon the businesses ability to repay the SBA 504 loan.

Q. What if the borrower has an independent business, can it obtain a loan for the required borrower contribution?

A. Yes. The same principles apply to an independent business loan that apply for the HELOC or other personal loans and is solely a credit decision. The loan must be on reasonable terms and conditions that will adversely affect the businesses ability to repay the SBA 504 loan.

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