If you’re a regular reader, you might remember a couple of eBulletins asking, “ … Refi or Purchase?” I wrote around New Year’s ’24. Refresher: Edgar and his CDC co-worker Cathy Cautious disagreed about a 504 loan. Don’t remember? No worries. It’s been a while. Turned out that Cathy Cautious won the day. Good ol’ Edgar. He keeps right on charging ahead. He called the other day with his newest prospect for a 504 loan. Another “day at the office” here at JRB:

EDGAR. Richard, this is a fantastic business! Cathy’s not here to approve the financing proposal. But they want to get SBA approval quickly. I’ve emailed the proposal to you. Take a fast look and let me know it’s okay and I’ll get the deposit.

ME. Well, Edgar, the proposal makes sense and seems to meet SBA eligibility requirements. Credit is acceptable, and cash flow is adequate. But I can’t find a note about the source of the cash for the required borrower contribution. How is the prospect coming up with it?

EDGAR. Don’t worry about that. The loan won’t close for a few months, and by then they’ll have plenty of cash for their contribution.

ME. Whoa, Edgar! The borrower contribution must be evident somewhere. Usually, it’s on the prospect’s business financial statement or that of an affiliate, or on the principal’s personal financial statement. But you cannot tell SBA that it will show up sometime, somewhere.

EDGAR. Well maybe it’s a seller carry.

ME. If so, there should be a provision for that in the purchase agreement.

EDGAR. Oh I remember! They’re getting it from the spouse’s Great Aunt Sadie. I just don’t remember if she is giving it to them or lending it.

ME. Nice! But if it’s a gift, you need a gift letter. And if it’s a loan, you need a letter from Sadie stating the terms and conditions of the loan. Kind of like a commitment letter.

EDGAR. OK. Then what?

ME. If it’s a loan, you’ll have to include the repayment in the cash flow analysis. If there’s sufficient cash flow, Sadie can get regular payments of principal and interest. If there isn’t, then you’ll have to defer all or part of the payments. What’s more, Aunt Sadie should be warned that if she’s going to collateralize her loan with the project assets, her loan cannot be repaid faster than the 504.

EDGAR. I’ve got to tell my prospect all that?

ME. Yeah. It’s always best that the prospect knows all the requirements as soon as possible. Now, aren’t you glad we had this conversation while Cathy was out of the office? She’ll appreciate your attention to detail!

Richard Jeffrey, Senior Associate
CDC/504 Program
www.richard@jrbrunoassoc.com
www.jrbrunoassoc.com