CDC/504 Program

The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, with each covering a specific geographic area.

†Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped.

Maximum Debenture

The maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal (see below).The maximum SBA debenture is $2.0 million when meeting a public policy goal.

  • The public policy goals are as follows:
  • Business district revitalization.
  • Expansion of exports.
  • Expansion of minority business development.
  • Rural development.
  • Increasing productivity and competitiveness.
  • Restructuring because of federally mandated standards or policies.
  • Changes necessitated by federal budget cutbacks.

Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)

Expansion of small business concerns owned and controlled by women.

The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has:
Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and All of its production facilities located in the United States.

In order to qualify for a $4 million 504 loan, the Small Manufacturer must 1) meet the definition of a Small Manufacturer described above, and 2) either (i) create or retain at least 1 job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or (ii) improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].

What funds may be used for:

Proceeds from 504 loans must 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, consolidating or repaying debt, or refinancing.

Terms, Interest rates and Fees:

IInterest 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 three (3) percent of the debenture and may be financed with the loan.

Collateral:

Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

Eligible Business:

To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $8.5 million and does not have an average net income in excess of $3 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

For more details, log into www.sba.gov


Business Loan Checklist

SBA is not the only source for small business loans. State and local economic development agencies and numerous non-profit organizations provide low-interest loans to small business owners who may not qualify for traditional commercial loans.

While every loan program has specific forms you need to fill out and documents you need to submit, you will likely need to submit the same information for different loan packages.

Before you start applying for loans, you should get some basic documentation together. The following are typical items for any small business loan application:

  • Loan Application Form

    Forms vary by program and lending institution, but they all ask for the same information. You should be prepared to answer the following questions. Itís a good idea to have this information prepared before you fill out the application:

    • Why are you applying for this loan?
    • How will the loan proceeds be used?
    • What assets need to be purchased, and who are your suppliers?
    • What other business debt do you have, and who are your creditors?
    • Who are the members of your management team?
  • Personal Background

    Either as part of the loan application or as a separate document, you will likely need to provide some personal background information, including previous addresses, names used, criminal record, educational background, etc.

  • Resumes

    Some lenders require evidence of management or business experience, particularly for loans that can be used to start a new business.

  • Business Plan

    All loan programs require a sound business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow and balance sheet.

    Here are some resources for preparing your business plan:

  • Personal Credit Report

    Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. Itís critical you try to clear these up before beginning the application process.

  • Business Credit Report

    If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your businessí credit report before beginning the application process.

  • Income Tax Returns

    Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.

  • Financial Statements

    Many loan programs require owners with more than a 20% stake in your business to submit signed personal financial statements.

    You may also be required to provide projected financial statements either as part of, or separate from your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individuall.

    The following forms may be used to prepare your projected financial statements:

  • Bank Statements

    Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.

  • Accounts Receivable and Accounts Payable

    Most loan programs require details of a businessí most current financial position. Before you begin the loan application process, make sure you have accounts receivable and accounts payable.

  • Collateral

    Collateral requirements vary greatly. Some loan programs do not require collateral. Loans involving higher risk factors for default require substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral. In any case, it is a good idea to prepare a collateral document that describes cost/value of personal or business property that will be used to secure a loan.

  • Legal Documents

    Depending on a loanís specific requirements, your lender may require you to submit one or more legal documents. Make sure you have the following items in order, if applicable:

    • Business licenses and registrations required for you to conduct business
    • Articles of Incorporation
    • Copies of contracts you have with any third parties
    • Franchise agreements
    • Commercial leases
  • Organizing Your Documents

    Keeping good records is essential for running a successful business, but even especially critical when applying for a loan. Make sure required documents are orderly and accurate. All information you provide will be verified by your lender and the organization guaranteeing the loan. False or misleading information will result in your loan being denied. Finally, make sure you keep personal copies of all loan packages.

  • More Information

    If you plan on applying for an SBA loan, check out the SBA Loan Application Checklist for specific requirements.

    Visit the Finance, Money & Taxes Community Forum to get answers to your questions, and discuss financing issues with other small business owners and industry experts.

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