Ask the Experts

Q1: What are the guidelines for defining "new business" in a 504 project?

A1: When a 504 project is for a "new" business, the legislation requires the small business (or its owners, stockholders, or affiliates) to provide at least 15 percent of the eligible project costs. In addition, the maximum percentage that the 504 loan will finance, in these cases, is 35 percent. The additional 5 percent injection by the borrower cannot be used to reduce the exposure of any lender other than SBA.

The basic definition is: If the small business has been in operation for a period of 2 years or less, it is considered new. Note, that the length of time in business is determined by the date the business started or had its first sale. The date of incorporation prior to a business start date is not utilized in determining the length of time the company has been in business.

Another frequently asked about transaction is: What happens if a borrower is expanding its operations into another state? The following guidelines should be used when there is an existing business, which believes that the 504 project should be considered an extension of its existing operations, and, therefore, not "new":

(a) Is the clientele for the 504 project similar to that of the existing business?

(b) Are the market demographics for the 504 project similar to that of the existing business?

(c) Is the day-to-day management the same for the existing business and the 504 project?

(d) Is the product or service the same or similar as for the existing business?

If you have a project that you would like considered under the 504 loan program, it is always beneficial to consult your local FFCFC representative early on in the process. Our staff can assist you in a proper classification and structure of a project. They can also help you pre-clear a “new” or “existing” business determination with the U.S. Small Business Administration. Click here for the FFCFC representative for your area.

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