Equity Contributions

The borrower must contribute to the project cash (or property acceptable to SBA obtained with the cash) or land (that is part of the project property) valued at 10 percent or more of the project cost. In some cases this equity injection can be borrowed. Examples of this are using an existing business line of credit or borrowing against unrelated assets such as a home equity loan. In all cases, credit and re-payment issues must be addressed.

When an applicant is a start-up business (less than 2 years old), increased equity requirements exists. At a minimum, the borrower in a start-up firm must contribute at least 15% equity. Additionally, some types of assets are considered special or limited purpose. Projects involving these types of assets also require additional equity (15%). If the applicant is a start-up and the project involves a special purpose asset, then the borrower must contribute 20%. 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.

Eligible Land Contribution
The borrower's contribution may be land (including buildings, structures and other site improvements, which will be part of the project property) previously acquired by the borrower. If the land has been held for at least 2 years, an updated appraisal can be used to determine the value of the contribution. Otherwise the basis for the value of the contribution is cost.

Machinery and Equipment Projects
On projects involving new machinery and equipment, the allowance given as "trade in" on the old machinery and equipment may be used as part of the equity injection.

When the Borrower's Contribution is Borrowed
The borrower may borrow its cash contribution from a third party. If any of the contribution is borrowed, the interest rate must be reasonable. If the loan is secured by any of the project assets, the loan must be subordinate to the liens securing the 504 loan, and the loan may not be repaid at a faster rate than the 504 loan unless SBA gives prior written approval.

The Requirements for Evidence of the Borrower's Contribution
The following are some documents that may be used as evidence of the equity contribution:

• Copies of all documents evidencing the source and terms of any loans
• Receipts, canceled checks or other evidence satisfactory to SBA
• A bank's settlement statement evidencing the purchase of the property
• The "pay-out sheets" maintained by the interim lender

Collateral

• The 504 loan is typically secured with a subordinate lien on all project assets
• The SBA requires that the 504 loan must have a security interest in all project assets
• We can recognize existing prior liens in the case of building expansions and renovations
• Personal guarantees of all principals owning more than 20% of the company are required
• If the business is a start-up or the asset being financed is considered single purpose or the credit is unusually risky, additional collateral may be required
• Key Man life insurance is typically required unless there is a strong management succession plan
• Adequacy of collateral is a credit decision- additional collateral can be required by GrowthCorp or SBA

Fees
Most of the up front fees associated with the 504 Loan Program are included in the loan from GrowthCorp. Total processing fees are approximately 2.15 percent of the amount of the GrowthCorp loan, plus GrowthCorp attorney fees ($2,500 maximum). A breakdown of the fees is as follows:

GrowthCorp Processing Fee	1.5%
Colson Services Fee	.25%
Bond Underwriter (20 year bonds)	.4%
Closing costs including GrowthCorp Attorney Fees	$2,500

These fees are generally added to the amount of the GrowthCorp loan. Ask GrowthCorp for a specific example regarding the fees and total amount.

Upon acceptance of a preliminary application for review and processing, GrowthCorp requires that the borrower submit a refundable $1,000 deposit. Upon issuance of a final commitment (SBA Loan Authorization), the applicant is responsible for a commitment fee equal to 1% of the 504 loan amount. If the Applicant completes the loan in accordance with the requirements of the Authorization, the commitment fee together with the application deposit will be used to pay for the closing costs, including, but not limited to, credit reports, title insurance, recording and search fees, and other out-of-pocket costs. Growth Corp will send a statement detailing the costs paid from these funds together with a refund of the balance after the loan is funded. Applicant agrees that if the requirements of the Authorization are not met, preventing the loan from being completed, the application deposit and the commitment fee shall be deemed compensation to Growth Corp for its services.

Interest Rate
The interest rate for 10 and 20 year 504 debentures is based on the market forces at the time the bond is sold. Generally the rates have been between 60 to 100 basis points above the 5 and 10 year Treasury bonds. A borrower's monthly payment will include principal, interest and a loan servicing/guaranty fee.

Monthly fees added to the debenture rate
CDC Service Fee	0.625% *
CSA Fee	0.1
SBA Guaranty Fee	0.021 **
	0.75%

This annual fee added to the debenture rate is approximately the borrower's total cost of funds.

* The CDC servicing fee ranges up to 1.5%
** current as of October 1, 2007

Lenders Responsibility
The conventional bank portion of the project has a few specific requirements including:

• Provide interim financing for the entire project
• Interest Rate: may be fixed or adjustable but can not exceed Prime plus 2.75%
• Term: a minimum of 10 years if requesting a 20 year term 504 loan; a minimum of 7 years if requesting a 10 year term 504 loan
• The bank's note and lien instruments must not allow future advance clauses except advances for the reasonable costs of collection, maintenance, and protection of the bank's lien(s)
• Cannot be cross-collateralized with other financing provided by the bank

Case Example
A widget manufacturer that has been leasing space wants to purchase a building and new equipment to facilitate business expansion. The financing package is as follows:

Purchase of Land	$500,000
Construction of Building	$1,000,000
Purchase of Equipment	$200,000
Furniture and Fixtures	$50,000
Professional Fees	$50,000
Total	$1,800,000

If a bank was willing to finance the project conventionally, it typically would lend up to 80% of the project cost at a floating interest rate, say prime plus one percent, for 15 years with a three to five year balloon. Utilizing the 504 program, up to 90 percent of the project cost can be financed. The bank lends only 50 percent, thereby reducing its risk and corresponding interest rate. GrowthCorp lends up to 40 percent at a fixed rate for 20 years.

	Conventional	With 504
Bank	$1,440,000	$900,000 (15 years)
GrowthCorp		$720,000 (20 years)
Small Business	$360,000	$180,000

As shown, the business' equity injection can be reduced by $180,000, thereby conserving cash and providing the necessary working capital to support growth. Additionally, cash flow is improved as a result of the longer maturity and potentially lower rates.

Rate History

Statutory fees are paid monthly to CDC, SBA and CSA. Fees are adjusted every 5 years based upon the balance of the note at that date. The approximate amount of the monthly fees adds about 1% to the debenture rate