How to Use the Small Business Administration's 504 Loans

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What it is: The SBA’s Certified Development Company (CDC) /504 Program provides long-term, fixed-rate financing for businesses acquiring new facilities or purchasing equipment to update existing locations.

The 504 program is about helping a small business purchase the assets needed to take it to the next level. Loans cannot be used for working capital or purchasing inventory -- allowed uses under the SBA’s primary 7(a) program.

How it works: The SBA will entirely guarantee a 504 loan covering 40 percent of project costs. The maximum limit is often $5 million on the SBA’s portion. The 504 loans do not come directly from the SBA, but are rather provided by local nonprofits that the SBA has designated as Certified Development Companies.

The business is required to kick in 10 percent out of pocket. A private sector lender, often a bank, finances the other 50 percent.

Upside: You can save money financing a real estate or equipment purchase -- thanks to Uncle Sam watching your back. Payments are lower because the loan terms can last as long as 10 or 20 years. The assets being financed are the collateral, along with personal guarantees from the principal business owners. And the SBA has requirements to keep interest rates competitive

Downside: It can be summed up in three words: federal government bureaucracy. So prepare yourself for the paperwork. The application process is further complicated because of the multiple parties involved in the deal -- the CDC, the SBA and the private lender (or lenders).

The size of the SBA guarantees are based on job creation or other public policy goals. If you’re basing your application on jobs, the SBA will back $65,000 for every position created or retained. (It’s $100,000 per job for manufacturers.) Or you might have to prove that your project will meet community development goals, such as helping to revitalize a business districts or increase U.S. exports.

Obtaining a 504 loan might also become more difficult if there is not a Certified Development Company in your area.

How to get it: The SBA has a search engine for finding local CDCs. You might also contact the local SBA District Office and inquire on where you might seek a 504 loan. 

Another way to get a 504 loan is to find a local bank with a niche in SBA lending. If your business is a good fit, the bank might be eager to help you obtain the 504 loan from the CDC in order to win the private loan portion of the deal. You can find out which area banks have the highest small business loans volume by doing a search on the SBA website

Does the local community stand to lose out on a multimillion-dollar project and job creation if your deal doesn’t go through? You likely have an attention-grabbing story that could persuade your city’s economic development department or other community development agencies to go to bat for you. The might even provide you some public subsidies or special "gap financing" to seal the deal. If you're going to be tied to job goals anyway, you might as well get a local property tax break or other incentives, too.

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