When entrepreneurs plan to start or expand their businesses, one of their main concerns and needs is where to find the necessary financing. The U.S. Small Business Administration is the largest backer of commercial loans for small businesses in the U.S., offering a variety of loan guaranty programs to accommodate most small business financial needs.
Borrowers who come to the SBA for assistance often hear about the CDC/504 Loan Programwhich is one of the two most popular loan programs offered by the agency and is designed to encourage economic development within a community by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization on reasonable terms and to stimulate employment through a job retention/creation goal.
Now, there seems to be some confusion out there in regards to CDCs, what they are and what they do. The confusion arises because there are two types of community and economic development entites identified as “CDCs” whose roles are somewhat similar and often intersect.
What is a CDC?
In economic and community development there are two types of entities that use the acronym CDC: Community Development Corporation, CDC, (associated with affordable housing) and the SBA Certified Development Company, CDC, (associated with SBA 504 loans assisting small businesses).
Community Development Corporations
While there is no established legal definition for Community Development Corporations, this type of CDC is “defined” by their community-based leadership and community-oriented goals which are, primarily, fostering job creation and access to affordable housing.
These entities are non-profit institutions organized under section 501 (c) (3) of the federal Internal Revenue code, which designates them as tax-exempt, non-profit organizations. This designation is essential so that the institution may receive grants and gifts from both public and private sources.
These community organizations are set up by residents, small business owners, church congregations, members of civic associations, etc. to promote the revitalization of their community in terms of housing and job creation. They also provide a host of different social services to residents in need. Community Development Companies need not be certified by any national entity, although some states require them to meet certain criteria in order to receive state funding.
SBA Certified Development Companies
SBA Certified Development Companies are the CDCs associated with SBA lending. Both types of CDCs are non-profit organizations “set up to contribute to the economic development of the communities in which they are located.” Certified Development Companies are authorized by SBA to market, package and service SBA 504 loans. Based on their shared economic development and job creation goals, a Community Development Corporation may also apply to become an SBA Certified Development Company, as long as it meets SBA’s requirements.
Some of the requirements for an organization to operate as a Certified Development Company are:
- Be a non-profit corporation in good standing
- Have at least 25 members representing the following groups:
- Government organizations responsible for economic development in the specific community and acceptable to SBA
- Financial institutions that provide long-term, fixed asset financing in the community where it operates
- Community organizations dedicated to the local economic development
- Businesses located in the area of operation
- Have a board of directors chosen from among the members and representing at least three of the four membership groups
- Meet a minimum level of lending activity
All these requirements –and others not mentioned here- have to be met to be certified by the SBA.
SBA lending through CDCs (Certified Development Companies)
SBA CDCs participate in what is known as the CDC/504 loan program. This is an SBA program designed for financing fixed assets such as equipment or real estate. Typically, a CDC/504 Project is structured as follows:
- A loan (or first mortgage) secured with a senior lien from a private-sector lender covering 50 percent of the project cost
- A second mortgage secured with a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost (financing cannot exceed $5 million with the exception of certain small manufacturing businesses and certain energy projects which cannot exceed $5.5 million), and
- A contribution of at least 10 percent equity from the small business borrower.
For more information about SBA-certified CDCs, visit www.sba.gov or contact your local SBA District Office.