US Small Business Administration 504 Loan (SBA 504)
What is the CDC/504 Program?
The CDC/504 loan program is a long-term financing tool, designed to encourage economic development within a community. The 504 Program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.
A Certified Development Company (CDC) is a private, nonprofit corporation which is set up to contribute to economic development within its community. CDCs work with SBA and private sector lenders to provide financing to small businesses, which accomplishes the goal of community economic development. Typically, a CDC/504 project includes:
- A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost
- A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the project cost
- A contribution from the borrower of at least 10 percent of the project cost (equity)
This type of setup means that 100% of the project cost is covered either by contribution of equity by the borrower, or the senior or junior lien.
How 504 Loan Funds May Be Used
Proceeds from 504 loans must be used for fixed asset projects, such as:
- The purchase of land, including existing buildings
- The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
- The construction of new facilities or modernizing, renovating or converting existing facilities
- The purchase of long-term machinery and equipment
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.
To be eligible for a CDC/504 loan, your business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
Maximum Debenture (Total Amount of Loan)
The maximum SBA debenture is $1.5 million when meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers which have a $100,000 job creation or retention goal (see below).
The maximum SBA debenture is $2.0 million when meeting a public policy goal. These include:
- Business district revitalization
- Expansion of exports
- Expansion of minority business development
- Rural development
- Increasing productivity and competitiveness
- Restructuring because of federally mandated standards or policies
- Changes necessitated by federal budget cutbacks
- Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
- Expansion of small business concerns owned and controlled by women
The maximum debenture for small manufacturers is $4.0 million. A small manufacturer is defined as a company that has its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and all of its production facilities located in the United States. To qualify for a $4.0 million 504 loan, your business must meet the definition of a small manufacturer and accomplish one of the following:
- Create or retain at least one job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act) ]
- Improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act]
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.
Interest Rates and Fees
Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately 3 percent of the debenture and may be financed with the loan.
Important Notification Below:
504 Development Company Program Fee Eliminations:
For eligible loans approved through the Agency’s section 504 Development Company Program on or after February 17, 2009, The SBA will temporarily eliminate two program fees:
- Third-Party Participation Fees (Small Business Investment Act Section 503(d)(2) fees codified at 13 CFR 120.972); and
- CDC Processing Fees (13 CFR Section 120.971(a)(1) fees).
Consistent with the Recovery Act’s temporary elimination of CDC Processing Fees, CDCs will no longer be allowed to collect deposits from small business applicants that would have gone towards payment of the CDC Processing Fee upon loan approval under 13 CFR 120.935. SBA will reimburse the CDCs for the waived CDC Processing Fees.
The SBA will pay CDCs two-thirds of the estimated CDC Processing Fee at the time of loan approval by the SBA or upon the issuance of a loan number for a loan approved under the Premier Certified Lenders Program. The remainder of the fee will be paid immediately following debenture funding and will be equal to 1.5% of net debenture proceeds for which a CDC does not collect the CDC Processing Fee, minus the amount previously paid. If a borrower has already paid a CDC for the fee, the CDC must reimburse the borrower from the SBA refund. The SBA will not permit CDCs to cancel loans approved by the SBA prior to February 17th, 2009 and resubmit them in order to qualify for the reimbursement of the processing fee. If the Participation Fee has already been paid to the SBA on an eligible loan, the SBA will refund the fee.