SBA CDC 504 Loan Program | Small Business Loan Central

SBA CDC.504 Loan Program

Get Email Alert & Tips for Your Small Business

Posted: 8/12/11 04:30 PM

Contributed By: Sandeep Bansal FRIEND HIM ON Twitter | LinkedIn | Facebook

The SBA CDC.504 Loan Program is offered by the U.S. Small Business Administration (SBA) to provide financing for small businesses in local communities. The partially subsidized loans are designed to stimulate business activities and economic development on a local scale.
CDC.504 loans can be repaid over longer periods allowing for smaller, more manageable payments. The interest rates for the loans are fixed.

Eligibility for CDC.504 loans

The SBA CDC.504 Loan Program requires that applicants meet the following qualifications:

The business must qualify as a “small business” as defined by the SBA. The tangible net worth of the company must not exceed $7.5 million and the average net income after taxes must not exceed $2.5 million for the two years preceding the loan application.
The business must operate on a for profit basis.
The business cannot be involved in speculation or rental real estate investment.

Loan structure

CDC.504 loans are for major acquisitions that are used for business modernization or expansion. A private, non-profit Certified Development company (CDC) works with the SBA and private lenders in the local community to help small business development.

The loans are generally set up in the following manner:

The private lenders provide up to 50 percent of the funding for the business project.
The CDC provides up to 40 percent of the funding for the project with a 100 percent SBA-guaranteed debenture bond.
The small business borrower must provide at least 10 percent of the project funding.
The assets purchased with the financing serves as collateral for the loans. In addition, the principal owners of the small business must provide personal guaranties.
Interest rates for SBA CDC.504 loans are determined by the current market rate for five-year and 10-year U.S Treasury securities. The loans mature either in 10 or 20 years.
The borrower must pay fees that total about three percent of the debenture and these fees may be paid with the loan. Some fees may not apply due to temporary elimination by the Recovery Act.

The CDC.504 loan is thus designed to provide 100 percent of the funding for the project by combining the contributions of the borrower, CDC and the private lenders.

Permitted use of funds

The SBA CDC.504 Loan Program permits loan funding to be used for the following purposes:

To purchase fixed assets like buildings, land and equipment.
To make improvements to current assets including road improvements, backup power generation, landscaping, water supply and security infrastructure improvements.
To construct new facilities or renovate existing ones.

Funding may not be used as working capital, to build up inventory, to repay financial obligations or to obtain refinancing.

How much funding is available?

The maximum loan amount for an SBA CDC.504 loan depends on the specific type of economic development project under which the loan is classified. For SBA job creation loans, the maximum debenture is $1.5 million and the borrowing business must create or retain one job for each $65,000 of SBA funding. Small manufacturers only need to create or retain one job for every $100,000 of funding.

For public policy development loans, the maximum SBA debenture is $2 million. Businesses that are involved in rural development, minority businesses, exporting businesses, veteran-owned businesses and businesses owned by women are examples of the types of companies that can qualify for public policy-focused loans.

The SBA also offers loans specifically for small manufacturers with a maximum debenture of $4 million. In order to qualify for these loans, the business must:

Have a primary operation that meets the definition of “small manufacturer” as found in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS).
Create or retain one job per $100,000 of SBA funding.
Have all its production facilities located in the United States.
Improve the local economy or meet one or more public policy goals.

Who should apply?

The CDC.504 loan is ideal for small businesses that need financing for modernization or expansion projects. The loans can only be used for acquisition of major fixed assets and cannot be utilized for working capital, speculation or other purposes.

The borrower will need to provide at least 10 percent of the funding for the project and the total costs must fit within the SBA’s debenture limitations. For example, if the business helps fulfill a public policy goal such as district revitalization, then 40 percent (the SBA's share) of the total financing costs should not exceed $2 million.

We Highly Recommend