What Is an SBA 504 Loan?
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 ca
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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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Related Questions
What are the benefits of an SBA 504 loan?
The SBA 504 loan program offers several benefits to businesses, including long-term, fixed-rate financing, lower interest rates, and lower down payment requirements than SBA 7(a) loans and express loans. The loan is also designed to allow those purchases at below market rates. Additionally, the SBA 504 loan program 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 Certified Development Companies (CDCs).
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What are the eligibility requirements for an SBA 504 loan?
In order to take out an SBA 504 loan, your business must meet the following eligibility requirements:
- Your business must be a for-profit organization.
- Your business must meet current SBA size standards.
- Your business’ net worth cannot exceed $15 million.
- Your business cannot earn 1/3 or more of its income from packaging SBA loans.
- Your business must earn an average of $5 million or less per year (after taxes, and only for the preceding two years).
- Your business cannot be engaged in any sort of passive or speculative activities.
Note that additional requirements may be placed by CDCs or conventional lenders. You can find a full list of eligibility requirements and other important information with the SBA here.
What types of businesses are eligible for an SBA 504 loan?
Businesses that are for-profit, small businesses with a net worth below $15 million, and that create or maintain jobs, and occupy the property acquired with the loan are eligible for an SBA 504 loan. Investors must also have good credit and a good financial history.
What are the terms of an SBA 504 loan?
The SBA 504 Loan Program offers loan amounts up to $5 million ($5.5 for manufacturers), with loan terms of 10 to 20 years (fully amortizing). Rates are fixed at Prime + 1.25% - 2.75%, and the loan to value (LTV) is up to 90% (80% on hotels and motels). The minimum debt service coverage ratio (DSCR) is 1.20x on existing cash flow, and the loan uses the project assets being financed as collateral, with personal guarantees from the principal owners. Fees are typically 3% of the debenture, which may be financed with the loan.
How do I apply for an SBA 504 loan?
The SBA 504 loan application process is relatively simple. Before applying, however, borrowers should make sure that they meet the eligibility requirements for 504 loans. Other steps include finding a CDC as well as choosing the lender that will contribute the other part of your loan proceeds. To help you better understand the SBA 504 loan application process, we’ve created an easy, step-by-step list:
- Make sure you qualify for the 504 loan program. You can learn more with the SBA.
- Find a CDC. Your local SBA office can help you connect. OR, you can find an SBA-approved lender.
- Complete the pre-qualification process with your lender/CDC.
- Get all of the required paperwork together. Your CDC can help you determine what paperwork is necessary.
- Complete the loan application, and all other required forms, and finalize the terms of your loan.
- Find a lender if you have not already done so.
We’re here to help you get the commercial financing you need. Simply fill out the form below for a risk-free consultation and a free SBA loan quote!