Choosing the Right Lender for an SBA 504 Loan

When taking out most any type of loan, you must do your due diligence in choosing a lender. Things are a bit different with an SBA 504 loan. That is, you can only work with a lender that works with the CDC you are using. What that means is that the lender and CDC will usually have a preexisting relationship and have agreed to work together to help small businesses obtain the funding they require for growth and success.

Note that this is not always the case. You are free to approach any lender you want about a 504 loan. However, not all lenders are willing to work with this program, and not all lenders will qualify, either.

In short, you’re not required choose a lender from the thousands across the country. Instead, you can choose a lender based on the available partners suggested by the CDC you use. This, of course, means that choosing the right CDC is vital.

The reason you do not have more leeway when choosing a lender is simple. It is due to the way the three-party loan setup works with 504 loans. The bank and the CDC must agree to unwrite the loan, and while both parties have separate lending guidelines, they must communicate during the underwriting process to address any concerns. The bank and the CDC must also coordinate loan conditions and terms, and both must confirm that all 504 loan program requirements have been met.

With all of that being said, there are a few things that you should consider if you decide to search for your own lender.

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Go Local: Because 504 loans and CDCs are hyper focused on the impact your project will have on the local economy and business landscape, it is often better to look for a local bank or credit union that is SBA approved and willing to work with the 504 program. You might also benefit from the $15 billion made available to US states through the State Small Business Credit Initiative. Note that not all 50 states participate, but you can learn more about this initiative and your state’s involvement here.

Certification/Preferred Lenders: It’s important to remember that only approved lenders can work with the 504 program. So, when you start comparing your options, SBA-approval is one of the first things that you should look for on a bank or credit union’s website. To help you out, you can find a list of SBA approved lenders through your local SBA district office. Not sure where that is? You can look it up here.

Tools: While the SBA has discontinued its online lender lookup tool called SBA Direct, you can still use the organization’s website to help you find lenders in a more roundabout way. Start here to browse through lenders that might fit your needs.

How Do I Choose the CDC for an SBA 504 Loan?

With most other loans, your only decision is which lender to work with. However, that is not the case with a 504 loan. You will need to choose the CDC you work with in this instance. That’s true even if you want to go with your own lender, but is particularly true for business owners who want to streamline the process and work with a lender that already has an existing relationship with the CDC. So, how do you choose a CDC? Why does it matter which one you choose? Let’s take a closer look.

Why Does Your Choice of CDC Matter?

Let’s start by discussing why your choice matters. While there are over 250 different CDCs currently operating in the US, they vary from one another a great deal. Yes, all of them must meet SBA requirements and be approved, but that does not mean that they are all the same. They can vary in a wide range of ways. So, what should you look for?

Considerations When Choosing a CDC

There are several considerations that you should make when comparing CDCs. They include the following:

Location: One of the first considerations is the location of the CDC. In most cases, CDCs are authorized to work with businesses within their chartered state, but that does not mean that they are located near your business. This is particularly important due to the local focus CDCs are supposed to have when making 504 loans. The more local the CDC, the better.

However, there may be instances where you have access only to a handful of CDCs, and some states only have one or two. You can find all your options by using the SBA’s search-by-state tool here. Simply choose your state from the dropdown menu, and you’ll be provided with the name, address, phone number and website link for all CDCs in the state.

Relationships with Lenders: Another important consideration is which lenders the CDC has a relationship with currently. Again, a new lender/CDC relationship can be created, but it is generally simpler to work with a pair that have an established relationship. The can help alleviate miscommunication and streamline the process of getting your loan.

Efficiency: Efficiency is a difficult thing to quantify when it comes to CDCs, but it generally comes down to how long it takes to get the loan processed, and how easily the CDC (and the bank) can handle any issues that arise during the lending process. This includes how quickly the CDC can answer questions from the SBA’s Sacramento, CA, loan processing office. Note that all 504 loans are processed through the Sacramento office, although loan servicing may occur through the Fresno, CA, or Little Rock, AR offices. Efficiency also has to do with how easily a CDC can work around difficulties encountered during the underwriting process.

Responsiveness: You are going to have questions and concerns throughout the loan application and underwriting process. That’s natural. It is impossible to anticipate all the questions you or your lender might have during initial consultations, whether face-to-face or by phone. Because of that, you need to make sure that the CDC you choose is responsive when there is a need to communicate with them.

Experience: Another important consideration when choosing a CDC is the organization’s length of history. There is nothing inherently wrong with choosing a newly minted CDC, but an organization that has been around for some time will have considerably more experience handling 504 loans, and will be better able to adapt to your unique needs and requirements. There’s also the fact that more experienced, established CDCs are more likely to have relationships with lenders, further simplifying the process for you.