Tap to get financing
SBA 504 Loans
SBA 504 Loans
Loan usesRequirementsDown paymentsRates and costsCalculatorApplication processCompare SBA loansSBA 504 RefinancingApplication ChecklistClosing ChecklistLoan AssumptionFrequently Asked Questions
Requirements Application process Calculator Blog
About
About usContact us
Get financing
Close sba504.loans is an independently owned and operated website and has no government affiliation. We are not the Small Business Administration and are not a lender. If you are trying to reach the SBA click here to be redirected.
Newly Published
Aug 26 at SBA 504 Loans
What Is SBA Form 159?
Aug 26 at SBA 504 Loans
What Is the Small Business Administration?
Aug 26 at SBA 504 Loans
What Is SBA Form 770?
Explore the Janover Network
Mar 24 at Multifamily Loans
The Best 3 Multifamily Loans for Affordable Housing in 2023
Mar 20 at Multifamily Loans
Multifamily Minute Reader Reflections: How Will Bank Failures Impact Multifamily?
Mar 17 at Commercial Real Estate Loans
Top 10 Commercial Real Estate Lenders of 2023
Was This Article Helpful?
Last updated on Oct 18, 2022
7 min read

Loan Assumption

Everything you need to know about loan assumption for the SBA 504 loan program.

Better Financing Starts with More Options Start Your Application and Unlock the Power of Choice. Click Here to Get Quotes →$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
In this article:
  1. Can An SBA 504 Loan Be Assumed?
  2. What Does Loan Assumption Really Mean?
  3. Why Consider Allowing Your Loan to Be Assumed?
  4. What Is Required to Assume an SBA 504 Loan?
  5. Pros and Cons of Assumable Loans
  6. Get Financing

Can An SBA 504 Loan Be Assumed?

Many types of loans are not assumable. They must be paid off, or refinanced. However, there are some notable exceptions. Most FHA loans are assumable, for instance, but so is the SBA 504 loan. How does this work? Why would a business owner want to allow someone to assume their business loan?

What Does Loan Assumption Really Mean?

Chances are good that you are familiar with a few loan-related terms – words like principal, interest, term, borrower and the like. Assumption is one of those terms that just isn’t used all that often in the world of lending, for many reasons. The process is actually pretty straightforward, though.

In this situation, you have two parties – a business owner with a 504 loan they want to offload, and a buyer who wants whatever it is that the owner is selling, usually the collateral that secures the loan, such as real estate, or heavy machinery. Assuming that the buyer meets all the qualifications and requirements, they would pay whatever the owner is asking, and then step into the loan and make the remaining payments on it.

That’s really all there is to the loan assumption concept. Of course, it is a bit more complicated in practice.

Why Consider Allowing Your Loan to Be Assumed?

Why would a business owner want to allow their loan to be assumed? Doesn’t this mean they would lose control over whatever collateral was used to secure the loan? Yes, it does, but that may not be a negative thing in all situations.

One reason a business owner might want to allow their loan to be assumed, and one that we have touched on already, is if they want to avoid the prepayment penalty on the loan. By allowing a buyer to assume the loan, they are able to get out from under those payments without being required to pay a prepayment penalty. Also, the new buyer is not on the hook for any prepayment penalties, either.

There are plenty of other reasons for a business owner to consider allowing their 504 loan to be assumed, including:

  • They no longer need the real estate, building, or equipment securing the loan.

  • They are moving their business location and are unable or unwilling to relocate the collateral.

  • They need to sell their business or their assets but want to avoid prepayment penalties.

  • They are downsizing their business and no longer require the collateral.

These are just a few examples of possible reasons a business owner would allow their loan to be assumed. However, why would a buyer want to assume a 504 loan rather than applying for such a loan on their own?

There are numerous reasons for this. Just a few possible explanations include the following:

  • Ability to purchase machinery for less than the cost of new.

  • Ability to purchase real estate for their own business interests.

  • Ability to purchase a building for their own business.

  • Ability to take advantage of lower fixed interest rates than are currently available on the market.

What Is Required to Assume an SBA 504 Loan?

You will find that assuming an SBA 504 loan is very similar to applying for one in the first place. However, there are some key differences that must be addressed, and there are requirements for the buyer interested in assuming the loan.

First, the current owner must determine how much money they will require upfront. This represents the equity they have built up in the real estate, machinery, or other collateral through regular loan payments. The individual assuming the loan will need to pay this amount upfront prior to assuming the loan itself.

Second, there is no such thing as automatic approval when it comes to assuming a 504 loan (or any other loan for that matter). The assumption must go through the SBA, and each one is handled on a case-by-case basis. In addition, the following requirements, steps, and conditions apply:

  • Proof of ongoing insurance on the collateral with the SBA named as mortgagee must be provided.

  • All loans must be current before an assumption can commence.

  • The person assuming the loan must meet the same eligibility requirements as any other borrower.

  • The assuming individual must have experience and management skills that equal or exceed those of the original borrower.

  • The assumption cannot have any negative impact on the collateral securing the loan.

  • The person assuming the loan must have the ability to pay the entire loan in full.

  • No collateral can be released during the assumption progress – all collateral will remain part of the loan and must be paid off by the individual assuming the loan.

  • The person assuming the loan must have good personal and business credit.

  • The assumption cannot cause any negative impact to the business in question.

  • The existing collateral should be of sufficient value to continue to secure the loan. If the value of the collateral is no longer enough, additional collateral will need to be put up by the person assuming the loan.

  • If there is any type of shortfall, the original obligors cannot be released from the loan. In this instance, the original borrower will be responsible for some of the costs of the loan even after it has been assumed. Paying the loan off avoids this.

  • SBA 504 loans can only be assumed once, and the new loan must include a “due on sale or death” clause to prohibit any future assumptions.

  • All parties involved must sign a written agreement that specifies the terms of the assumption.

  • Assumptions cannot include any sort of real estate contract in which the seller retains an interest in the property until a specific amount of money has been paid.

In addition to those rules and requirements, the SBA requires a wide range of forms and papers from both parties. These are as follows:

The new borrower (assuming the loan) must provide:

  • A signed and dated letter in which they consent to the assumption of the loan.

  • As personal history statement, including one from all corporate officers (SBA Form 912).

  • A personal financial statement from everyone who will be listed as a new borrower (SBA Form 770).

  • A signed Borrower’s Consent to Verify Information and 3rd Party Authorization – note that all borrowers and guarantors must sign this.

  • Income tax returns for the last two years from all borrowers.

  • If the individual assuming the loan represents a corporation, SBA Form 160 must be provided.

  • If the new borrower represents an LLC, a copy of the company’s bylaws and articles of incorporation must be provided.

  • A balance sheet and P&L statement for the last 90 days must be supplied.

  • UCC lien searches of collateral/business assets dated within the previous six months.

The current borrower (seller) must provide:

  • A letter explaining the assumption, including an explanation of any cash paid to the seller by the individual assuming the loan. The letter must be signed and dated by all original borrows/guarantors (except in the case of death).

  • If one or more of the original borrowers or guarantors has died, a copy of the death certificate must be provided.

  • A list of all collateral currently secured by the loan, including an evaluation (tax assessment or appraisal) completed by a third party.

  • If applicable, court documents granting the assuming individual ownership of the estate must be provided).

  • SBA Form 770 (Financial Statement of Debtor) completed, signed, and dated.

  • A Borrower’s Consent to Verify Information and 3rd Party Authorization signed by all current borrowers and/or guarantors.

  • Tax returns covering the previous two years for all current borrowers (sellers).

  • If applicable, a completed buy/sell agreement.

A loan assumption letter created by the SBA for this specific purpose can be downloaded in PDF format here.

Pros and Cons of Assumable Loans

Now that we have looked at the nuts and bolts of the assumption process, we need to delve into the question of whether or not assuming a 504 loan is a good decision or not. There are actually pros and cons to both.

Pros:

  • Can avoid prepayment penalties

  • Can speed the sale of the business

  • Can provide a cost-effective solution for obtaining partial funding

  • Can provide easier approval of remaining financing by a third-party lender due to a lower loan-to-value ratio

Cons:

  • The CDC will charge a fee of 1% of the balance of the loan being assumed.

  • Only the CDC-provided funds can be refinanced – the conventional lender’s loan must be repaid. This means anyone assuming the loan will need to find another conventional lender to work with.

  • Assuming a 504 only offers partial financing. The new borrower must attain other financing to complete the process.

  • SBA 504 loans can only be assumed one time, meaning whoever assumes it must pay it off eventually.

In this article:
  1. Can An SBA 504 Loan Be Assumed?
  2. What Does Loan Assumption Really Mean?
  3. Why Consider Allowing Your Loan to Be Assumed?
  4. What Is Required to Assume an SBA 504 Loan?
  5. Pros and Cons of Assumable Loans
  6. Get Financing

Getting a small business loan should be easy.⁠ Now it is.

Click below for a free, no obligation quote and to learn more about your loan options.

Get financing →
Janover logo

SBA 504 Loans is a Janover company. Please visit some of our family of sites at: Multifamily Loans, Multifamily Today, Commercial Real Estate Loans, SBA7a Loans, CMBS Loans, Apartment Loans, HUD Loans, HUD 221d4 Loan, HUD 232 Loan, HUD 223f Loan, HUD 223a7 Loan, SBA Express Loans, SBA 504 Loans, and OpportunityZones Help.

Janover Inc.

6401 Congress Ave
Ste 250
Boca Raton FL 33487

[email protected]

Site Information

Privacy Policy
Terms of Use

This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We are a technology company that uses software and experience to bring lenders and borrowers together.

All users should perform their own due diligence and research. Nothing on this website is an offer or a solicitation for a loan. This website does not endorse or charge you for any service or product. None of the information on this site constitutes legal advice. We are not affiliated with the Small Business Administration (SBA). If you need to visit the SBA directly please click here: sba.gov

Click here for our Advertiser Disclosure.

Copyright © 2022 Janover Inc. All rights reserved.