What is a SBA 504 Loan?

The SBA /CDC 504 loan program is a long-term financing vehicle designed to stimulate economic development within a community. The 504 program does this by providing small businesses with long-term fixed rate loans of up to 20 years for the acquisition of fixed assets (real estate and long-term machinery or equipment) for expansion or modernization. The program is administered through a local Certified Development Company (CDC), a non-profit corporation that works with the Small Business Administration (SBA) and private sector lenders to provide the needed financing to small business.

Typically, a 504 loan is funded in the following manner:

• A private sector lender provides up to 50% of the project cost with a loan secured by a senior lien position. This is normally accomplished with a first trust deed on real estate. Rates for this loan are generally at commercial market rates with interest resets at least every 5 years.
• The CDC ( backed by a 100% SBA-guaranteed debenture) provides up to 40% of the project cost with a loan in a junior position, normally a second trust deed position. Rates are generally below prevailing market rates and are fixed for a period of 20 years.
• The borrower will contribute at least 10% of the project cost in the form of equity.

The proceeds from such a loan can be used for purposes such as the purchase of land, including existing buildings, land improvements, construction of new facilities or renovating existing facilities, and the acquisition of long-term machinery and equipment. The 504 Program may not be used for working capital, inventory or accounts receivable financing, vehicle or airplane financing, taxes or franchise fees. Loans also cannot be made to businesses involved in investment or speculation in rental real estate.

Under certain circumstances, the SBA 504 program will allow refinances of existing owner-occupied real estate. The parameters for this program have not yet been released by the SBA.