CDC 504 LOANS

The SBA CDC/504 Loan Program is a unique and robust financing tool designed to promote economic development within communities by providing small businesses with long-term, fixed-rate financing for major fixed assets, such as real estate and equipment. Here is an expanded description of the SBA CDC/504 Loan Program:

Overview:

The SBA CDC/504 Loan Program is structured to provide small businesses with the capital needed for significant fixed asset purchases that promote job creation and business growth. The program involves a collaboration between three parties: a Certified Development Company (CDC), a private sector lender (such as a bank or credit union), and the SBA. This tripartite arrangement helps spread the risk and makes it easier for small businesses to secure the necessary funding for substantial projects.

Key Features:

• Loan Structure: The 504 loan is divided into three parts:

  • The SBA-Guaranteed Loan (40%): The SBA, through a CDC, provides up to 40% of the total project cost, with a maximum amount of $5 million ($5.5 million for small manufacturers or certain energy-efficient projects).

  • Private Sector Lender Loan (50%): A private sector lender covers up to 50% of the project cost. This portion is not guaranteed by the SBA, making it a standard commercial loan.

  • Borrower Contribution (10%): The borrower contributes a minimum of 10% of the project cost. Startups or special-purpose properties may require a higher contribution (up to 20%).

• Eligible Uses of Funds: The 504 loan can be used for various purposes related to major fixed assets, including:

  • Purchasing land and existing buildings

  • Constructing new facilities or renovating existing one

  • Purchasing long-term machinery and equipment

  • Improving land, streets, utilities, parking lots, and landscaping\

  • Ineligible Uses of Funds**: The funds cannot be used for working capital, inventory, or refinancing debt (except under specific circumstances).

• Loan Amounts

  • Standard Projects: Up to $5 million

  • Small Manufacturers or Energy Efficiency Projects: Up to $5.5 million

• Repayment Terms: The 504 loan provides long-term, fixed-rate financing with repayment terms of 10, 20, or 25 years, depending on the nature of the assets being financed.

• Interest Rates Interest rates on the SBA portion of the loan are fixed and typically below market rates. Rates are based on the current market rate for 5- and 10-year U.S. Treasury issues plus an increment above Treasury rates.

• Collateral The assets being financed usually serve as collateral for the loan. Additionally, personal guarantees from the principal owners (those with 20% or more ownership) are required.

• Job Creation Requirement One of the primary objectives of the 504 Loan Program is to promote job creation. Typically, the business must create or retain one job for every $75,000 of SBA funding provided ($120,000 for small manufacturers). Exceptions may apply for public policy goals.

Application Process:

1. Preparation: The borrower must prepare a comprehensive business plan and gather necessary financial documents, such as tax returns, financial statements, and a detailed description of the project.

2. Initial Lender Application: The borrower applies to a private sector lender for the 50% commercial loan portion. If approved, the lender and borrower then work with a CDC to structure the SBA portion of the loan.

3. CDC Application: The CDC reviews the project and submits the loan package to the SBA for approval. This package includes details of the project, financial information, and the job creation plan.

4. SBA Approval: The SBA reviews the application and, if approved, issues a loan authorization outlining the terms and conditions.

5. Funding and Disbursement: Once approved, the private sector lender provides interim financing for the project, which is then replaced by the SBA-backed 504 loan upon project completion.

Benefits of SBA CDC/504 Loans:

• Long-Term, Fixed Rates: Offers stability and predictability in payments.

• Lower Down Payment: Minimizes the upfront costs for small businesses.

• Promotes Economic Development: Encourages job creation and retention, supporting community growth.

• Large Loan Amounts: Provides substantial funding for significant capital investments.

• Collaborative Financing: Involves private lenders, reducing the risk exposure for each party.

Drawbacks:

• Complex Application Process: The process involves multiple steps and parties, making it more time-consuming and detailed.

• Eligibility Criteria: Strict requirements must be met, including job creation or retention goals.

• Limited Use of Funds: Funds are restricted to fixed asset purchases and improvements, not for working capital or inventory.

The SBA CDC/504 Loan Program is an invaluable resource for small businesses looking to make substantial investments in fixed assets that drive growth and job creation. While the application process is more complex and the use of funds is restricted, the benefits of long-term, fixed-rate financing and lower down payments make it an attractive option for businesses ready to expand their physical infrastructure. By fostering collaboration between private lenders, CDCs, and the SBA, the program helps small businesses achieve their expansion goals while contributing to broader economic development.