Many successful small businesses will need money to expand for purchasing, leasing, or building. The U.S. Small Business Administration (SBA) Certified Development Company loan program is a long-term financing tool for economic development within a community. The 504 Program provides start-up and growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
Certified Development Companies (CDCs) are nonprofit corporations that facilitate the 504 program and are set up to contribute to the economic development of its community. CDC’s work with the SBA and financial institutions to provide financing to small businesses. The 504 program is designed to get below market fixed-rate financing in the hands of small business owners. It is essentially a second mortgage-type product for commercial real estate.
Over 90% of small businesses are eligible for a 504 Loan. The business must be a for-profit business, however, and there are certain restrictions related to gambling, speculation, investment real estate, and businesses that discriminate.
Proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term useful life machinery and equipment.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. It is primarily designed to get fixed rate money in the hands of small businesses that are financing owner-occupied real estate.
There are three aspects to a 504 Loan. First, there is a mortgage that is made by a private financing institution, usually a local bank that covers up to 50% of the project cost. In addition, there is a second mortgage for up to 40% of the project that is made by a CDC and guaranteed by the SBA. Finally, the third aspect is a 10% to 20% down payment that is provided by the borrower.
The SBA requires the down payment on behalf of the borrower to make sure that they have a stake in the business. The second mortgage portion, for up to 40%, has a 100% guarantee from the US Government on it. Therefore, that percentage is sold by the development companies to investors at below market fixed rates. The maximum debenture is typically about $1.5 million, although in some cases the debenture can be as high as $4 million if the borrower is a manufacturer.
The two basic maturities of the 504 program are either 10 years or 20 years. The loans do amortize over that period of time and there are some fees involved. There is an upfront fee that is paid by the borrower at the time the loan is funded. There are also fees at the time of funding that are included in the loan amount and there is an ongoing monitoring fee that is paid as part of the monthly loan payment.