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For Lenders: Financing the 504 Way

The biggest challenge your clients will face as business owners next to starting their own business is taking it to the next level.

Some of you may have clients who by now are considered seasoned entrepreneurs; they have successfully navigated around the pitfalls that cause early business failure; they’re ready to grow, and financing again is an issue.

Enter the SBA 504 loan program, especially designed to help small businesses at this juncture.

Also called the Certified Development Company (CDC)/504 Program, this is a long-term financing tool for economic development within a community. CDCs provide growing businesses with long-term, fixed-rate financing for major fixed assets, such as land, buildings and machinery and equipment.

CDCs are nonprofit corporations set up to contribute to the economic development of their communities. They work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide and three located across Montana that each serve the entire state.

Most companies that qualify as small businesses can qualify for a CDC/504 loan.  Companies must meet specific SBA size standards: The Small Business Applicant and its Affiliates (affiliation defined at 13 CFR 121.103) must have:

a) A Tangible net worth of $15 million or less; and

b) Average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years of $5 million or less.

The 504 project has three components: a direct commercial loan from the private sector covering 50 percent of the project, and secured by a senior lien; a loan secured with a junior lien from the CDC covering up to 40 percent of the cost, and backed by a 100 percent SBA-guaranteed debenture; and a contribution of at least 10 percent equity from your business.

This type of SBA loan has some specific requirements that businesses have to meet in order to qualify: they have to meet job creation criteria or a community development goal, and public policy goals. 

The maximum gross debenture cannot exceed $5,000,000 for regular 504 loans and community development/public policy projects.  Generally, a business must create or retain one job for every $65,000 provided by the SBA.

The public policy goals are as follows:

• Business district revitalization
• Expansion of exports
• Expansion of minority business development
• Rural development
• Enhanced economic competition
• Restructuring because of federally mandated standards or policies
• Changes necessitated by federal budget cutbacks
• Expansion of small business concerns owned and controlled by veterans
• Expansion of small business concerns

504 loans to “small manufacturers” cannot exceed a maximum debenture of $5.5 million. The criteria to qualify for these loans include: creation or retention of at least 1 job per $100,000 guaranteed by the SBA, and that all production facilities be located in the United States.  

Additionally, each 504 project that reduces the borrower’s energy consumption by 10%; or increased use of sustainable designs, including designs that reduce the use of greenhouse gas emitting fossil fuels or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact; or plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings or communities consumption, commonly known as micropower, or renewable fuel producers including biodiesel and ethanol producers. Note: the terms in subparagraphs (b) and (c) have the meanings given those terms under the Leadership in Energy and Environmental Design (LEED) standards for green building certifications. qualify for a maximum debenture of $5.5 million.

There can be more than one Project (for small manufacturers and eligible energy projects) for the same applicant or for its affiliates. The $5,500,000 per Project is not reduced by other prior SBA loan amounts outstanding because the $5,500,000 is a limit per Project not a limit for each small business concern.

Note: 504 loans made for Projects for small manufacturers or eligible energy loans as described above do not reduce the $5,000,000 limit for each small business concern for regular 504 loans and loans for Public Policy Projects.

Growing a business may, and usually does, involve spending in several different areas.  Funds under the 504 program, however, can only be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.

The 504 Program cannot be used for working capital or inventory, but does allow for limited debt refinance if it is part of an expansion project.

As with the SBA’s more widely known loan guaranty program, 504 loans are designed to help the small business owner be successful.  Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues.  Maturities of 10 and 20 years are available.  Fees total approximately 3 percent of the debenture and may be financed with the loan.

For more information about SBA programs and services, visit