What Is an SBA 504 Loan?

SBA 504 Loans: What You Need to Know

The SBA 504 loan program, also called the Certified Development Company program, is designed to provide assistance for business owners with very specific requirements. This is not a general loan that can be used for whatever a business needs, nor is it designed for new companies that need startup capital. Instead, the 504 loan is designed to help businesses in need of purchasing fixed assets. These are generally things like real estate and equipment, but can also be fixtures, new buildings, machinery and the like. The loan is also designed to allow those purchases at below market rates.


The SBA explains it this way: “The SBA 504 loan program is a powerful economic development loan program that offers small businesses another avenue for business financing, while promoting business growth, and job creation … The 504 loan program provides small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. 504 loans are made available through Certified Development Companies (CDCs), SBA’s community-based partners for providing 504 loans.”

There are several unique aspects to these loans, including the fact that there are three actual partners in the financial arrangement. They also have only fixed terms available, and all of them require the borrower to provide money down, although that can come from another loan, so long as it is not an SBA loan.

Another unique aspect of this loan program is the fact that it must be used for projects that will create a specific number of jobs per the amount of money loaned, or it must meet some type of community development goal or public policy goal while complying with the job average requirements that pertain to CDCs.

Who Are the Three Partners in an SBA 504 Loan?

There are three parties in the 504 loan process. The first is the borrower. The second is an SBA approved lender. The third is the Certified Development Company. Each of these parties has different responsibilities within the loan.

The lender is responsible for providing 40% of the loan amount. The Certified Development Company is responsible for providing 50% of the loan amount. The final 10% of the total loan principal actually comes from the borrower. Note that 10% is the minimum the borrower can put down, and there are some instances in which you might be required to contribute up to 20% of the cost.

So the three parties are you (the business owner/borrower), the lender, and the Certified Development Company. Chances are good you’re familiar with how lenders operate, so that makes the CDC the most confusing of the three. What are these organizations and what is their role in the loan, other than providing a percentage of the funding? Why does the SBA require that they be involved in the first place?

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