U.S. Small Business Administration 504 Loan Program (SBA 504)

SBA 504 loans

ATRDC Brochure

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 10-20 percent of the project cost (equity) based on qualification criteria.

How 504 Loan Funds May Be Used

Proceeds from 504 loans must be used for fixed asset projects, such as:

      •  Purchase of land, including existing buildings
      •  Improvements, including grading, street improvements, utilities, parking lots
         and landscaping
      •  Construction of new facilities or modernizing, renovating or converting existing            facilities
      •The purchase of long-term machinery and equipment, (fixed assets).

The 504 Program cannot be used for working capital or inventory.

Eligibility

To be eligible for a CDC/504 loan, your business must be operating as 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.

Collateral

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.

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:

      1. Third-Party Participation Fees (Small Business Investment Act Section 503(d)(2) fees codified at
         13 CFR 120.972); and
     2. 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.

Revolving Loan Fund Programs (RLF)

East Texas Rural Access Program (ETRAP) 

The East Texas Rural Access Program RLF is primarily for the healthcare industry in a thirty-eight county area and was established in 2003 with initial funding from the Robert Wood Johnson Foundation for $500,000 and a USDA Rural Business Enterprise Grant for $200,000. This fund has the following loan terms:

     • Minimum Loan Amount- $25,000
     • Maximum Loan Amount- $150,000
     • Loan Term- 5-20 years
     • Rate – Floating Prime rate plus 1%
     • Collateral- real estate, equipment, accounts receivable
     • Equity Injection- 25% • Purpose – inventory, working capital, equipment and real estate
     • Job/loan ratio- none

This is a new program with funding from the Robert Wood Johnson Foundation and the U.S. Department of Agriculture. The ETRAP RLF is managed by the North East Texas Economic Development District Inc.

Northeast Texas Economic Development District (NETEDD) 

The NETEDD RLF is primarily for private industry in an eleven- county area in Northeast Texas and was established in 1987 with initial funding from an EDA grant for $1.4 million. This fund has the following loan terms:
     • Minimum Loan Amount- $10,000
     • Maximum Loan Amount- $300,000
     • Loan Term- 5-20 years
     • Rate – Prime rate fixed for the life of the loan
     • Collateral- real estate, equipment, accounts, receivable
     • Equity Injection – 25% • Purpose – inventory, working capital, equipment and real estate
     • Job/loan ratio- 1/$35,000

Chapman Revolving Loan Fund (CRLF)

The Chapman RLF is primarily for public entities (IDA, IDC, Cities, nonprofit 501 (c) 3’s) in a nine-county area and was established in 1995 with initial funding from a HUD grant for $1.4 million. This fund has the following loan terms:
     • Minimum Loan Amount- $35,000
     • Maximum Loan Amount- $250,000
     • Loan Term- 5- 20 years
     • Rate – 3% fixed for the life of the loan
     • Collateral- Assignment of Sales Tax Revenue
     • Equity Injection- 20%
     • Purpose – inventory, working capital, equipment and real estate
     • Job/loan ratio- 1/$35,000

***Call to determine current fund availability for all RLF funds.