Explaining the SBA 504 Debenture Process

What Does it Mean and How does it Work?

A debenture is really a fancy word for a special kind of bond. It is an “instrument” created by a lender to raise capital. Lenders create a debenture and are in first position to be repaid. This debenture is bought and sold on financial markets.

Debentures are an integral part of the Small Business Administration (SBA) 504 loan program.

Here’s how the SBA 504 program with Debenture works:

• There are three entities that fund the loan: a senior lender, a Certified Development Company (CDC) and the borrowers themselves.
• The Senior lender provides typically 50% of the funding through the first mortgage. Their loan is in the form of a bridge loan, because it bridges the gap while the full funding is underway.
• The CDC provides a second mortgage loan for a large chunk of the loan (around 40%). This portion of the loan is guaranteed by the SBA.
• CDC’s are not traditional lenders. They do not have depositors or customers in the same way. So, they raise funds through creating the debenture and selling it to investors. This debenture is 100% guaranteed by the SBA, and is considered a very safe investment.
• The borrower provides a modest equity contribution (typically 10-20% of the loan)

Advantages of an SBA 504 program with a Debenture Component

• Lower down payment/equity injection
• Competitive fixed-rate financing for the life of the loan
• Long repayment periods (up to 25 years)
• Affordable payments as a result of the loan repayment periods, which impacts cash flow immediately

Timeline of an SBA 504 loan from start to Finish:

• First, you have to select both a senior lender and a CDC. This is where GRP Capital’s expertise is the most critical. We have the experience and the vast lender network to help find both a lender who is willing to be in the senior position as well as an appropriate CDC.
• The senior lender and CDC coordinate so they agree on the loan structure and details.
• Once the senior lender and the CDC indicate their willingness to find your project, then dual underwriting commences. Borrowers work closely with our processing team to provide information and documents to both the lender and the CDC simultaneously.
• Both the senior lender and CDC officially approve the loan through their loan committee sturctures.
• The senior lender sets a closing date! The senior lender takes lead in creating documents, and agrees to a a place and time for closing. A title company, escrow and attorneys are also working on your behalf.
• The first loan closes: borrowers take possession of their new property, and funding for other costs begins (like construction and renovation).
• The borrowers begin making payments on the first loan.
• Now the creation of the debenture occurs. The debenture sale occurs around 30-60 days after the first closing. That’s why a bridge loan is necessary.
• After the CDC receives their funds from the sale of the debenture, they pay off the bridge loan in full. They then create their own closing documents and a second closing takes place.
• The permanent 504 loan is fully financed.
• The borrowers now make payments on the final permanent loan.

Why Should I Consider an SBA 504 loan?

• Your project is more attractive with an SBA guarantee, especially for senior lenders.
• The long terms and low rates are important to your business plans and projections.
• You are purchasing a building or a business OR
• You are refinancing and/or consolidating qualified debt OR
• You are renovating or involved in construction OR
• You are purchasing long-term machinery and equipment with a useful remaining life of a minimum of 10 years.
• You do not need financing for working capital, as that is not an eligible 504 component.