504 Loan
Definition
The 504 Loan, often referred to as the CDC/504 Loan Program, is a U.S.-based economic development financing tool designed to promote job creation and economic growth. Administered by the U.S. Small Business Administration (SBA), this program provides long-term, fixed-rate financing for major fixed assets, such as real estate and equipment, that promote business expansion and modernization.
Key aspects of the 504 Loan include:
- Participants: A 504 Loan typically involves three parties: the borrower (small business), a Certified Development Company (CDC) that represents the SBA, and a third-party lender, usually a bank.
- Loan Structure: Generally, the third-party lender provides 50% of the total project cost, the CDC covers up to 40% through the 504 loan, and the borrower contributes a down payment of at least 10%. This structure allows small businesses to secure financing with a lower down payment than traditional commercial loans.
- Purpose: 504 Loans can be used for purchasing land or existing buildings, building new facilities, renovating existing facilities, purchasing machinery and equipment, and covering certain soft costs related to these investments.
- Eligibility: To qualify, businesses must operate as a for-profit entity, have a tangible net worth of less than $15 million, and an average net income of $5 million or less after federal income taxes for the preceding two years. They must also meet job creation or community development goals.
- Interest Rates: The interest rates for 504 Loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues. Rates are fixed for the term of the loan.
- Terms: The loan terms can be 10, 20, or 25 years, depending on the nature of the assets financed.
The 504 Loan Program is especially advantageous for small businesses looking to expand and modernize, as it offers them access to more considerable amounts of capital at competitive rates, while also promoting community development and job creation.
Frequently Asked Questions
- What sets the 504 loan apart from other SBA loan programs like the 7(a) loan?
The 504 loan program is specifically designed for the purchase or improvement of major fixed assets, such as real estate or large equipment. It differs from the 7(a) loan program, which is more versatile and can be used for a wider range of business purposes including working capital, refinancing, and purchasing smaller assets. The 504 loan program often involves a partnership between a Certified Development Company (CDC) and a bank, where the CDC covers up to 40% of the loan, the bank covers up to 50%, and the borrower contributes 10%. This structure is unique to the 504 loan.
- What is the typical down payment for a 504 loan, and what are its terms?
The down payment for a 504 loan is usually 10% of the project cost, which can be a lower upfront cost compared to conventional loans. For new businesses or special-purpose buildings, the down payment might be higher. The terms for a 504 loan are typically 10, 20, or 25 years, depending on the use of the loan. Interest rates are fixed and based on the market rate for 5-year and 10-year U.S. Treasury issues. The long-term, fixed-rate nature of the loan is one of its most attractive features.
- Are new businesses eligible for the 504 loan program?
New businesses can apply for a 504 loan, but they might face more stringent requirements compared to established businesses. While there is no minimum operational period required, the borrower’s ability to repay the loan and the feasibility of the business plan are crucial factors. New businesses may need to provide a more detailed business plan and additional collateral to qualify for a 504 loan, especially considering these loans are often for substantial amounts of money tied to fixed assets.
- What are the basic requirements to qualify for a 504 loan?
The basic eligibility criteria for a 504 loan include:
- Operational Use: The financed assets must be used for operational purposes of the business.
- Business Size: The business must meet the SBA’s size standards.
- Good Character: Business owners must have a clear criminal record and a history of meeting financial obligations.
- Repayment Ability: The business must demonstrate the ability to repay the loan.
- Job Creation or Community Development Goals: The 504 program requires that the business meet certain public policy goals, like job creation or community development.
- Owner Occupancy: For real estate, the business must occupy at least 51% of the commercial space.
- Where can businesses obtain a 504 loan, and what role do Certified Development Companies play?
Businesses can obtain a 504 loan through Certified Development Companies (CDCs), which are non-profit corporations certified and regulated by the SBA. CDCs work with banks and other lenders to provide financing to small businesses under the 504 program. The typical structure involves a bank providing 50% of the total project cost, the CDC providing 40% through the 504 loan, and the business owner contributing the remaining 10%. The involvement of CDCs is unique to the 504 program and they play a crucial role in administering these loans.
Related Terms
Also see: 7(a) Loan, Debt Financing
