What is the 504 Loan Program?
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. As of February 15, 2012, the $50 Billion in 504 loans has created over 2 million jobs. This program is a proven success and win-win-win for the small business, the community and participating lenders.
The 504 Loan Program provides approved 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.
A Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.
There are over 260 CDCs nationwide each having a defined Area of Operations covering a specific geographic area. The area of operation for most CDCs is the state in which they are incorporated.
504 Loan Structure
40% of the total project costs,
covering up to 50% of the total project costs
contributing10% of the project costs. Under certain circumstances, up to 20% of the total project costs
504 Loan Example
Total 504 projects costs for a $1,000,000 project may include the following (eligibility requirements apply to the 504 portion of the project as well as the participating lending portion):
Building Purchase, land, renovation, furniture and equipment, soft costs
$500,000, 1st lien with bank (loan obtained from a private sector lender covering up to 50% of the total project cost)
$400,000, 2nd lien with 504 loan, 20 year, fixed rate (loan obtained through a CDC, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost)
$100,000, borrower contribution (contribution from the borrower of at least 10% of the total project cost/)
How 504 Loan Funds May Be Used
The use of proceeds from 504 Loans must be used for fixed assets (and certain soft costs), including:
- The purchase of existing buildings;
- The purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping;
- The construction of new facilities or modernizing, renovating or converting existing facilities;
- The purchase of long-term machinery* ; or
- The refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment*.
*Note: The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing (except for projects with an expansion component or that meet the temporary refinancing provisions of the Small Business Jobs Act of 2010).
Loans cannot be made to businesses engaged in nonprofit, passive or speculative activities. For additional information on eligibility criteria and loan application requirements, small business and lenders are encouraged to contact a Certified Development Company in their area.
504 Loan Specifics
Maximum Loan Amount (Debenture)
While there is no maximum project size, the maximum SBA loan amount (debenture) is $5 million. Small manufacturers or specific types of energy projects (as described in the energy project section) may qualify for a $5.5 million debenture.** Generally, a business must create or retain one job for every $65,000 guaranteed by the SBA. Small manufacturers must create or retain a ratio of one job for every $100,000. As an alternative to job creation or retention, your business may qualify if it meets a community development or public policy goal as long as the CDC maintains its portfolio job average requirements. These include:
Community Development Goals:
- Improving, diversifying or stabilizing the local economy;
- Stimulating other business development;
- Bringing new income into the community;
- Assisting manufacturing firms (North American Industry Classification System (NAICS), Sectors 31 to 33) and all of its production facilities located in the United States; or
- Assisting businesses in Labor Surplus Areas;
Public Policy Goals:
- Revitalizing a business district of a community with a written revitalization or redevelopment plan;
- Expanding exports;
- Expanding small businesses owned and controlled by women;
- Expanding small businesses owned and controlled by veterans (especially service-disabled veterans);
- Expanding minority business development;
- Aiding rural development;
- Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports);
Modernizing or upgrading facilities to meet health, safety, and environmental requirements;
- Assisting businesses in or moving to areas affected by Federal budget reductions, including base closings, either because of the loss of Federal contracts or the reduction in revenues in the area due to a decreased Federal presence; or;
- Reduction of rates of unemployment in Labor Surplus Areas determined by the Secretary of Labor; or
- Reduction of energy consumption by at least 10 percent;
- Increased use of sustainable design, including designate that reduce the use of greenhouse gas emitting fossil fuels, or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact, or
- Plan, equipment and process upgrades or renewable energy sources such as the small-scale production of energy for individual buildings or communities consumption, commonly known as micropower, or renewable fuels producers including biodiesel and ethanol producers.
**Contact your CDC or local SBA District office for additional details.
Generally, the project assets being financed are used as collateral. Personal guaranties from owners of 20% or more are also required.
Interest Rates and Fees
Interest rates on 504 Loans are correlated with the current market rate for 5-year and 10-year U.S. Treasury issues. Loan maturities of 10 and 20 years are available. Fees may be financed with the loan.
Fixed interest rates
Longer loan amortizations, No balloon payment, Fixed interest rates
Increased cash flow
Savings that result in increased cash flow