504 Loans

The SBA 504 loan is commonly referred to as a CDC or Certified Development Company loan.  The CDC 504 loan program was established in order to provide financing when a company or individual needed or wanted to purchase certain “fixed assets” at below current market rates.  In this particular situation, fixed assets are usually defined as buildings, equipment and machinery, or real estate.

Additionally, the CDC contributes to community development as a nonprofit corporation by working in conjunction with private sector lenders as well as the SBA.  CDC 504 loans provide smaller businesses with fixed-rate, long-term financing for the fixed assets discussed above.  According to the information available, projects that qualify for this particular SBA loan include:

  • Borrower contributions in the amount of at least 10% of the fixed asset equity
  • CDC secured loans with a junior lien that covers up to 40% of the project’s total cost and is backed by a 100% SBA-guaranteed debenture
  • Private sector loans with a senior lien that covers up to 50% of the cost of the project

Advantages for the Borrower and the Lender For CDC 504 Loans

The CDC 504 loan provides the borrower with:

  • fixed rate on the SBA 504 portion of the loan (mortgage payments never vary)
  • longer terms of up to 20 years (lowers your monthly payment amount)
  • lower down-payment requirement of only 10%
  • lower interest rates

There are certain advantages for the commercial lender.  These allow for:

  • 50% loan-to-value ratio
  • ability for smaller lending institutions to loan money on larger projects
  • decreased amount of risk
  • first lien position for the lender
  • limitations on the amount of exposure to a particular borrower and/or industry by larger lenders

Additional Considerations

The maximum loan amount on CDC 504 loans is $5 million, provided the business creates or retains one job for every $65,000 that is guaranteed by the Small Business Administration.  In addition to this, any financed project assets are used as collateral.  The borrower must agree to a 20% guarantee as well.  The percentage breakdown of the total project costs are covered as follows:

  • borrower – 10%
  • participating lender – 50%
  • SBA – 40%

In addition to the proceeds of the loan going to the fixed assets involved, there are certain costs that may be eligible as well, such as:

  • Paying for improvements such as grading, landscaping, parking lots, street improvements, and utilities
  • Purchasing existing buildings
  • Purchasing land
  • Purchasing long-term equipment and machinery
  • Refinancing debt associated with expanding the business

CDC 504 loans cannot be used for consolidating or repaying debt, inventory or working capital, and refinancing.

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