Partner Lenders
SBA 504 Loan Program
Abstract:
The SBA 504 Loan program is a co-lending product for long-term assets that involves collaboration between a private sector lender, such as a bank, and a certified development company (CDC). Each party makes a separate loan to a qualifying small business. Typically, the bank portion consists of a loan secured by a first lien, covering 50 percent of the project cost. Offering 504 loans may help banks attract small business borrowers that would benefit from long-term financing for plant and major equipment acquisition.
- Appendix A contains a sample term sheet for a 504 project.
- Appendix B provides examples of 504 loan projects.
- Appendix C contains sources of additional information on 504 loans.
What is an SBA 504 Loan Program?
The SBA Certified Development Company 504 Loan program provides financing for major fixed assets, such as owner-occupied real estate and long-term machinery and equipment. A 504 project includes a loan from a bank secured with a first lien typically covering 50 percent of the project cost, a loan from the CDC secured with a second lien (backed by a 100 percent SBA-guaranteed debenture) covering a maximum of 40 percent of the cost, and a contribution of at least 10 percent of the project cost from the small business being financed.
Proceeds from 504 loans must be used for fixed assets such as purchasing land and improvements, construction of new facilities, converting or renovating existing facilities, or purchasing long-term machinery and equipment. The 504 program cannot be used to fund working capital or inventory or to refinance or consolidate existing debt.
In conclusion, the 504 loan program was designed by the SBA to promote economic development by allowing small businesses to obtain 90 percent financing for fixed assets. This enables businesses to retain needed capital for expansion. SBA 504 loans help create economic development benefits both through job creation or retention and increasing the local tax base. In addition, the 504 structure allows borrowers to obtain a long-term fixed rate on their CDC loans, while providing banks with the flexibility to use a fixed- or floating-rate product for their portion of the loan.
The 504 loan program allows banks to make 50 percent LTV loans to qualifying small businesses, while retaining a first lien on the collateral. 504 loans may also receive positive CRA consideration.
What are CDCs?
CDCs are typically nonprofit organizations that have been certified by SBA to provide funding for small businesses under the SBA 504 program.
Some of which have as their sole product the 504 loan, while others offer a range of small business program in addition to the 504 loans and CDCs are supervised by the SBA.
