How SBA 504 can help small business.
Updated: Dec 10, 2022
The US Small Business Administration 504 Loan or Certified Development Company ( CDC) program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates. As part of CDC mission to promote the economic development and the growth of businesses. The 504 program is a participation program that allows CDC to partner with other financial institutions to allow the business owner to purchase the fixed assets that will help their business with little money down. The business owner puts a minimum of 10%, a conventional lender (typically a bank) puts up 50%, and CDC puts up the remaining 40%. The maximum CDC loan portion amount is $5.5 million ($5 million for meeting SBA-defined policy goals, and $5.5 million for manufacturers and
some energy-related policy goals).
How Financing Is Structured
A bank or other lender finances 50% of the project cost and takes a first mortgage (lien) position on the assets financed. CCD, through the SBA 504 loan, finances up to 40% of the project cost and takes a second mortgage position. The borrower then contributes a down payment of as little as 10%. If start up business, borrower is required to commit extra 5% (total of 15% initial injection). If building is also a non-conventional building i.e. gas station, hotel, borrower is required to commit an extra 5% (total of 20% initial injection). All related soft cost such as architectural fees, appraisal of real property or machinery, environmental studies, or contingency interest can be rolled into the loan.
Key Advantages of SBA-504 Loan
A minimal down payment by the small business owner, as low as 10%, borrowing up to 90% of the total financing needs, thus preserving cash for the business.
Long term financing, over 10, 20 or 25 years, which enhances the cash flow of the company and avoids balloon payments and mid- term negotiation of the loan that may result in higher interest rate and payments, the borrower’s monthly loan payment is more affordable.
Fixed Low Rates for life of the loan on CDC portion of the loan
Below Market fixed interest rates on 504 debentures.
Projected income consideration – SBA lenders consider projected income of a business in addition to historical cash flows. This is particularly advantageous for growing businesses
Loan Funds Can be used to
Purchase existing buildings;
Refinance your existing commercial mortgage
Purchase long-term machinery and equipment;
Purchase improvements (including grading, street improvements, utilities, parking lots and landscaping); or
Build new facilities or modernize, renovate or convert existing facilities.
Who Is Eligible
For Profit businesses
Must be at least 51% owner occupied
Business with tangible net worth less than 15 Million
A 504 loan cannot be used for
Working capital or inventory;
Consolidating, repaying or refinancing debt (although for a portion of the project, you may refinance debt associated with buying or renovating equipment or facilities); or
Speculation or investment in rental real estate.