Who Qualifies for an SBA 504 Loan

The Small Business Act (SBA), along with bank and non bank lenders and small lending firms known as Certified Development Companies (CDC), have put together a loan program that is specifically designed for businesses that are trying to do things like grow or expand a business, renovate or upgrade facilities and reorganize or restructure a business plan. Here are some of the things that such lenders might look at when making a decision on who qualifies for an SBA 504 loan.

Collateral: Collateral is that which a business puts up in case of their defaulting on a loan. For example, those who buy a car usually don't have to put up more collateral than the car they are purchasing. If a consumer were to buy a car and default on his or her car loan, then the bank would simply take the car away. For a small business, collateral might be a certain amount of machinery or real estate. For example, a small restaurant applies for, gets and later defaults on its 504 loan. If that small restaurant has put up its building as collateral, or the owner has put up his or her home as collateral, then those things would be repossessed by the lender.

Cash Flow: Cash flow is the capacity of a business to repay its loan. For example, if a business spends $500 a day just to keep its doors open, but only brings in $450, then that business has a negative cash flow. That means that this business will most likely have an extremely difficult time paying off its loans. However, if a business is spending $500 a day and making $1000, then that business will have surplus cash flow and will be more likely to pay its loans. Of course, having low cash flow will not necessarily mean that you are ineligible for an SBA 504 loan - it just means that you will have to convince the bank that the money will help your business grow to a point where cash flow will be enough to pay the bank back.

Credit: SBA loans are more flexible when it comes to credit. This means that your credit doesn't have to be excellent in order for you to qualify as a borrower. Lenders will still look at your personal and businesses' credit history. If you have an excessive amount of defaults or outstanding loans, then you are less likely to qualify for a loan. Despite the fact that the CDC debenture is completely covered by the SBA guarantee, the major lender will still be taking a gigantic risk loaning money to you.

Capital: Capital is how many resources are available to a business. If you are applying to get a loan and you have a lot of employees, machinery, equipment and facility, then you have a lot of capital even if it isn't in the form of money. What the amount of capital says about your business is whether or not you have to potential of making money. If you are a small business asking for a loan and your only capital is your best friend and yourself, then you have very little money making potential.