The SBA 504 Loan Program provides long-term, and fixed rate financing for investment in fixed assets. The loans are intended to help small and medium-sized businesses avoid large downpayment and floating interest rates that are typically associated with the purchases of "bricks and mortar" fixed assets. The program is also aimed at aiding local economies by increasing employment opportunities and the loans are tied to certain job creation mandates.
The majority of these loans are obtained by existing businesses looking to expand their operations. Startups occasionally use Section 504 if the type of business involves property ownership (rather than rental), as in the case of a manufacturer who determines that it would be cheaper to purchase real estate than to lease and possibly face relocation expenses, or a business that has a relatively low initial risk, and a significant equity base that reflects a long-term commitment. The program is also tied to job creation and typically a borrower is required to either create or retain one job for every $50,000 of total project cost.
Certified Development Companies. Section 504 loans are extended through SBA-approved companies called Certified Development Companies ("CDCs"). A CDC is a private nonprofit corporation set up to contribute to the economic development of its community or region. Typical CDC-financed projects range in size from $500,000 to $4 million, with an average cost of $1 million. The total size of projects using CDC financing is unlimited, but, as with SBA loan guarantees, the maximum amount of CDC participation in any individual project is $4,000,000 for manufacturers or $1.3 million for some public projects.
CDC Investors. Participants in a CDC are usually banks, utilities, professional organizations, community groups, and private investors. For banks in particular, lending through a CDC is an opportunity for them to meet their bank regulatory requirements for community lending while spreading the risk from those investments among the separate CDC corporate members. The bank also need not consider their CDC participation against their loan loss reserves. CDCs can also minimize risks by selling 100 percent SBA-guaranteed debentures to private investors in amounts up to 40 percent of a project or $750,000, whichever is less. Finally, CDC investing by banks creates an attractive loan-to-value ratio; the bank usually contributes only about 50 percent of the CDC loan proceeds, yet is given a priority claim against the value of the project or collateral. The Stimulus bill also gives the SBA the power to use the 504 CDC program to refinance existing loans to help develop more projects and create more jobs.
The 2009 Stimulus legislation authorizes SBA to establish a secondary market for pools of "first lien" loans under the 504 program. These "first lien" loans from commercial lenders currently have no SBA guarantee. The bill authorizes SBA to deploy federal guarantees for pools of these first lien loans, so that they can be sold to investors in a secondary market. Providing liquidity for these first mortgages will help encourage lenders to continue participating in SBA's 504 loan program, which provides a key source of capital for community development and other projects.
More detailed CDC 504 information can be found on the SBA site at this page.
If you're interested in obtaining a 504 loan, you'll also want to know about:
- qualifying use of 504 funds the purposes for which you can use loan proceeds
- eligibility criteria for 504 loans
- obligations of a borrower under a 504 loan