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SBA 504 Loans

The SBA 504 loan program, also known as the Certified Development Company (CDC) program, is designed to provide financing for the purchase of fixed assets, which typically means real estate, buildings, and machinery, at below-market rates. Here's an overview of the background and key features of SBA 504 loans:

How It Works

The SBA 504 loan involves three parties: the small business owner, a CDC, and a third-party lender, typically a bank. The structure is usually as follows:

- The bank lends 50% or more of the project costs This portion of the loan is secured with a senior lien on the purchased assets.

- The CDC lends 40%, up to a maximum of $5 million ($5.5 million for manufacturing projects or projects with specific energy goals), and this loan is backed by a junior lien.

- The borrower contributes at least 10% as a down payment.

 

Benefits

-Long-term, fixed-rate financing

- SBA 504 loans typically have terms of 10, 20, or 25 years, which helps small businesses plan their finances without worrying about the volatility of variable rates.

-Low down payment:

-The typically required down payment is lower than that of conventional loans, allowing small businesses to conserve their working capital.

Below-market interest rates

-Interest rates for the CDC portion of the loan are pegged to an increment above the current market rate for U.S. Treasury issues.

 

Eligibility Requirements

To qualify for an SBA 504 loan, a business must:

- Operate as a for-profit company in the United States.

- Have a tangible net worth of less than $15 million and an average net income of less than $5 million after taxes for the preceding two years.

- Plan to use the financed assets for the operation of the business (not for passive real estate investment).

- Meet job creation criteria or community development goals.

 

Use of Proceeds

Proceeds from 504 loans must be used for fixed assets and certain soft costs. These include:

- Purchasing existing buildings or land.

- Purchasing improvements.

- Constructing new facilities or modernizing, renovating, or converting existing facilities.

- Purchasing long-term machinery.

However, these funds cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.

 

Ideal Candidates

The SBA 504 loan is ideal for small to medium-sized businesses planning significant capital investments in their operations that will lead to job creation. It's particularly useful for businesses in manufacturing, child care, hospitality, and professional services.

 

The SBA 504 loan program is an excellent option for businesses that require large capital investments and can commit to potential job creation, making it a strategic choice for long-term growth and stability.

Purpose

The primary purpose of the SBA 504 loan is to promote economic development within a community. It achieves this by helping small businesses grow through the acquisition of fixed assets. The expectation is that these investments will lead to job creation or retention.

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