SBA 504 Loans

In contrast to SBA 7(a) loans, administered by local lenders, SBA 504 loans are a specialized lending program handled and funded by CDCs, an independent third-party nonprofit organization. The CDC prepares the application and forwards it to the SBA for review. Once approved, the CDC implements the loan by funding 40% of the project while private investors finance the other 50% through debentures, which earn interest semi-annually. Since the loans are backed by the government, the CDC and private lenders offer competitive rates compared to other financing options. In addition, the CDC can often offer lower fees and loan terms than a bank. While this may be a good option for a small business looking to grow and create more jobs, it’s important to understand the requirements and eligibility for SBA 504 loans before applying.

What is a Certified Development Company (CDC)?

CDCs are nonprofit organizations that foster economic development in their communities. The SBA certifies and regulates them, with more than 260 of them throughout the United States. A CDC will process a borrower’s application and help coordinate financing, including the private lender portion of the project. The CDC will then submit the complete application package to the SBA for approval.

A CDC will also be able to offer valuable expertise when it comes to SBA loan requirements, as they are accustomed to working with the complex paperwork and documentation involved in this type of financing. They are also accustomed to partnering with the types of lenders that make the loans that can be used as collateral for this type of financing.

SBA 504 Loan Eligibility

SBA 504 loans are a great way for small businesses to purchase real estate or large equipment, offering a range of repayment terms up to 25 years. However, not every business is eligible for this type of financing. The Small Business Administration has set a number of criteria that need to be met for a business to apply and be approved.

• First, your business must be owned and operated for profit. You must also be in business for two years. Your company’s net worth must be less than $15 million, and your average net income over the previous two years cannot exceed $5 million. Your business must be privately-owned and not publicly traded. It must also be a for-profit entity, such as an LLC, partnership, or corporation.
• In addition, your business must be able to make a contribution of at least 10% toward the project’s costs. Generally, you’ll also need to meet certain lending requirements, such as having a credit score of 680 or higher. Having a criminal record won’t disqualify you from SBA financing, but it will be reviewed on a case-by-case basis.
• A second requirement is that your business must be a Certified Development Company (CDC). This is typically a nonprofit organization with a mission to promote economic development in the region it serves. The SBA certifies and regulates CDCs, with over 260 operating throughout the country.
• If you choose a CDC, the bank that agrees to finance your 504 loan will be known as the “Third-Party Lender.” The Third-Party Lender typically provides half of the total project cost in a structure known as a debenture. This senior secured loan is offered at a market interest rate.
• There are a variety of fees associated with the SBA 504 program, but they are all financed within the loan’s total cost. There are no out-of-pocket expenses when obtaining an SBA 504 loan.
• Finally, the SBA requires that you’re in good standing with your local and federal tax obligations. This means you have paid all your taxes on time and complied with all other tax-related obligations.
• In particular, the SBA will want to see proof that you’re paying your real estate taxes. 
• You may also need to provide documentation that you haven’t incurred additional encumbrances on your collateral securing the loan unless you’ve obtained permission from the Small Business Administration to do so.

SBA 504 Loan vs. Other SBA Loans