What is an SBA 504 Loan?
What is the SBA CDC/504 Loan?
The 504 Loan is a program to create jobs, promote business growth, and provide business financing. To offer loans, the SBA partners with Certified Development Companies (CDC), which are non-profit corporations promoting economic development in their communities. Initially, the SBA certifies and regulates CDCs, and the CDC then works with small businesses to provide them with funding.
With this program, the loan is a combination of efforts on the part of three entities: a lender, the CDC, and the borrower. The lender contributes up to 50 percent of the loan, CDC covers 40 percent, while the borrower contributes 10 percent.
This particular loan provides several benefits over the traditional 7(a) loan: lower interest rates, lower down payments, lower fees, longer repayment terms, larger loan amounts, and no additional collateral needed.
How Can You Qualify?
Like many loans, qualification can depend mostly on your credit score. The higher the score, the better your chances of landing the amount that you need. For this program, if you have outstanding debt, it could be an issue for the CDC or lender.
Securing proof of down payment and proof of loan repayment is necessary. This means you’ll need a bank account with the 10 percent for your down payment and some more money for loan repayment. Businesses with a history of bankruptcies, foreclosures, and tax liens will face difficulty in securing the ideal loan.
The net worth of your business must not exceed $15 million, with an average annual income of $5 million or less (after federal income taxation) in the two years before the application is submitted.
Specifically, for this program, current buildings you own must be 51 percent owner-occupied. If you’re planning to build a new structure, it must be 60 percent owner-occupied on opening day, and this number should climb to 80 percent owner occupancy by the tenth year. This means buying an apartment building that you wish to lease is out of the question unless you plan to lease only 20-40 percent of the apartments.
Another rule for this program is that any equipment your business buys must have at least a 10-year lifespan. This cuts out things like computers and software and ensures only larger equipment, like farming machinery, are financed with the loan.
Lastly, your business must use the funds to create jobs or enhance the SBA’s other goals, like energy efficiency or public policy.
How to Apply
There are over 200 CDCs operating in the United States. If you’re unsure if your business meets requirements, you can ask local CDCs for a quick discussion to find out.
Bring bank statements that prove you can pay back your loan and swiftly put down a payment. Know your business credit score and include other financial documents. You also need a statement on how you plan to use the loan to create or retain jobs and how you’ll support the SBA’s public policy goals. For every $65,000 loaned, you must hire or retain one job. For small manufacturers, one job must be created for retained for every $100,000 loaned.
Check out this comprehensive checklist made by the SBA for your CDC/504 Loan application.
Who Is Best Suited for the CDC/504 Loan?
The program is available to businesses who intend to use the loan for buying land and renovating property. Other uses for this program include paying for improvements, building new facilities, buying other fixed assets (like equipment and machinery), and refinancing debt.
Businesses best suited for the CDC/504 Loan are for-profit businesses planning on using the loan for the aforementioned reasons. Those that operate in non-profit, passive, or speculative work are ineligible for this program. You cannot use this loan for working capital, materials or supply that counts as inventory and advertising and marketing. Additionally, normal operations, rental property, and speculative real estate purchases also can’t be financed with this loan.
Your Business’s Bottom Line
It’s easy to make money when you have money. And that’s what the CDC/504 Loan promises for your business. Still, you should determine whether this is the right SBA product for your business’s industry and current situation. Always do your due diligence by comparing other available types of loans before committing to what you think is best for your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.