The Essential Guide to the SBA CDC 504 Loan Program

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The Essential Guide to the SBA CDC 504 Loan Program

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Are you looking to grow your small business? The SBA/CDC 504 program is a powerful tool for small business owners looking to expand their business’ success.

What Are SBA 504 Loans?

As a small business owner, you may be needing a capital investment to help you boost your business' economic growth. In that case, you might be thinking about purchasing a real estate property where you can run your business better, or getting fixed assets such as modern machinery that will help it thrive.
In any of those cases, the SBA CDC/504 Loan is an exceptional choice for you. It provides small businesses with long-term, fixed-rate financing to purchase or rehab real state, equipment, and other fixed assets.
The SBA mission is to promote business growth and job creation. That's why they create loan programs such as the 504. This program is one of the Small Business Administration most popular programs. It consists of a partnership between a Certified Development Company (CDC) and a certified SBA lender.
Continue reading to find everything you need to know about the SBA CDC/504 program. We will tell you how it works, what are the SBA 504 rates, its requirements, how you can use the funds, and what makes you eligible.

What is a Certified Development Company (CDC)?

Certified Development Companies (CDC) are non-profit organizations that exist to boost economic growth locally.
CDCs must be certified by the SBA to be able to provide partial financing for small businesses, which in turn helps achieve the goal of providing economic development and generates job opportunities as well.
There are only 252 CDC’s active nationwide. Each of them works in the state that they are incorporated. Some make only 504 loans, others offer a range of programs to help small businesses.

How the SBA 504 program works

An SBA 504 loan can be broken down into three parts; the lender, the CDC, and the borrower. Each extends a portion of the loan.
While the borrower needs to put down at least 10%, the CDC part can go up to $5 million or $5.5 for manufacturers. The lender portion can double the size of the CDC portion.
• Down Payment (10%): As a requirement, the borrower needs to put a down payment of 10% – 15%.
• The CDC (40%): An SBA Certified Development Company will typically put this amount.
• The lender (50%): This percentage can also come from an alternative lender to cover the total project cost.
The proceedings of the 504 loan can be used to purchase fixed assets or upgrade existing ones, buy real estate or rehab existing one.

What are the SBA CDC 504 Loan Rates, Terms, and Fees?

Because these loans are guaranteed by the government agency, its rates and fees are lower than those you will typically find at a bank. That is one of the greatest benefits of SBA loans in general.
The 504 interest rates could be broken down into two. The portion that is provided by the CDC; and the percentage provided by the bank or certified lender. The SBA sets fixed rates for the CDC portion of the loan.
The SBA 504 Loan interest rates calculations are somehow complex. Different lenders publish an updated interest rate using the information given by the National Association of Development and the official organization of CDCs.
To learn more about the current SBA loan rates, read this blog.
As of December 2018, the maximum interest rate of the CDC portion of the loan ranges from 4.92% to 5.19% including fees depending on the size of the loan. The Small Business Administration sets the maximum that can be charged.
The certified lender or bank portion of the loan has rates that are established by each organization. They can be fixed or variable and are usually similar to what you get with a commercial real estate loan.

SBA 504 Terms

One of the reasons this type of loan is so convenient for small business owners is because its terms can be very long. The term of your loan will depend on the use you are going to give to the loan proceeds.
For example, if you are using it to purchase machinery or other types of equipment, it’s typically ten years, for purchasing real state or renovation it can go from 20 to 25 years.
What are the SBA 504 Loan Fees?
The standard fees are about 3% to 3.5% of your loan. Since this is a combined loan with one part coming from a lender and one part coming from a CDC it helps the SBA achieve their goals, and helps you get lower interest rates and longer terms than what you’d be able to find with a typical bank only loan. The 3 principal fees of an SBA 504 loan are:

  • Annual Servicing Fee: This fee is presently set at 0.368%
  • SBA Guarantee Fee: The Small Business Administration set this fee at 0.050%
  • CDC Fee: Currently set at 0.625%

SBA 504 Requirements

  • You must operate as a for-profit business entity
  • It is important you have a way to provide an equity injection of 10% of costs
  • It is required to create or retain jobs for the community
  • And you must have a private sector lender commitment up to 50% of project costs.

Please remember that this is a very lengthy process and there are multiple aspects that must be met in order to get an SBA CDC 504 loan. But if you meet all the requirements and have a bit of patience you will be rewarded with many benefits in the long run.