What Are SBA 504 Loans?

SBA 504 Loans

SBA 504 loans are provided by the Small Business Administration to small businesses. These loans are a means for small business people to acquire long term financing to promote economic development within your community.

If you are in business and need to obtain long term financing to obtain a commercial real estate or land for your business, this program may be a valid option. 504 loans are not working capital loans. These loans are not intended for the day-to-day operations of your business. SBA 504 loans are for fixed-rate financing of major assets, such as building, land or large capital business equipment.

How Does A SBA 504 Loan Work?

The Small Business Administration works with Certified Development Companies and private-sector lenders to provide alternative funding to businesses. A Certified Development Company (CDC) is a nonprofit corporation whose objective is to support economic development in the community in which it is located.

Typical successful funding 504 projects are made up of three separate parts. A private-sector lender provides a loan for 50% of the amount needed. A junior loan is provided by the CDC for 40% of the value of the project. The CDC loan is backed by a 100% SBA-guaranteed debenture. This leaves you, the borrower, to have to contribute 10%.

The SBA and a CDC provide these loans in accordance with the objectives of public policy goals. Public policy goals are objectives that the current administration has deemed necessary for the economic development and subsequent improvement of the quality of life in the targeted community. Some public policy objectives may be:

a) Business district revitalization b) Changes in the federal budget c) Expansion of minority business development d) Expansion of women-owned business development e) Expansion of veteran/disabled-veteran-owned business development

f) Expansion of exports g) Rural development

If the proposed expansion of your business meets the minimum job creation requirement and will achieve one or more of the public policy goals you may qualify for a 504 loan. Generally a business must create or retain one job for every $50,000 provided by the SBA. If your business qualifies as a “small manufacturer”, you must create or retain one job for every $100,000.

Advantages of a 504 Loan

You can give your business a tremendous upgrade in facilities, land or equipment acquisition with a small investment of equity (10%). You can get a fixed-rate loan for 10 or 20 years, which means you would not have to worry about seeking re-financing within a few years. You will know what your payments are for the term of the loan.

There are a few types of businesses that do not meet the criteria for these kinds of loans. If you business is involved in lending, investments, gaming or providing adult entertainment, you cannot qualify for a SBA 504 Loan.

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