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CDC/504 Program

Financial Resources For Northwest & West Central Ohio Entrepreneurs

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Purpose of Program

The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides small businesses requiring “brick and mortar” financing with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

Eligible Businesses

To be eligible for a CDC/504 loan, 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 $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

Eligible Use of Funds

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.
  • Purchasing long-term machinery and equipment.

For used buildings, the borrower must occupy at least 51% of the facility indefinitely. For new construction the borrower must initially occupy 60% of the entire space and 80% after ten years. Funds cannot be used to improve any part of an existing property to be subleased.

The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.

Loan Amount

The maximum SBA loan is $1.5 million when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $65,000 provided by the SBA except for small manufacturers, which have a $100,000 job creation or retention goal (see below).

The maximum SBA loan is $2 million when meeting a public policy goal. These include:

  • 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 loan for small manufacturers is $4.0 million. A small manufacturer is defined as a company 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 are located in the United States. To qualify for a $4 million 504 loan, the business must meet the definition of a small manufacturer and either create or retain at least one job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].

Repayment Term

The term for real estate financing is 20 years and the term for machinery and equipment financing is 10 years. A minimum term of 10 years is required from a private lender on real estate financing and 7 years for machinery and equipment.
 

Interest Rates

Interest rates on 504 loans are pegged to an increment above the current market rate for five year and ten year U.S. Treasury issues.

Fees

SBA fees total approximately 3 percent of the loan and may be financed with the loan. There may be CDC fees associated with establishing the loan. There may also be continuing fees associated with CDC servicing of the loan.

Prepayment

There is a prepayment penalty charged if the SBA loan is prepaid during the first half of its term. The penalty for prepayment of a twenty-year debenture is equal to 100% of one year's interest if the prepayment occurs in the first year of the loan, declining by 10% per year to zero after ten years.

The penalty for prepayment of the ten-year debenture is equal to 100% of one year's interest if the prepayment occurs in the first year of the loan, declining by 20% per year to zero after five years. In addition, a borrower may be responsible for up to six months interest depending upon the timing of the prepayment and compliance with the notice provisions of the debenture. Partial prepayments are not permitted.

Collateral, Security

Generally, the project assets being financed are used as collateral with theSBA being subordinate to the private lender. Personal guarantees from each owner of 20% or more of the business are required.

Assignment

The 504 loan is fully assumable through assignment of the loan to the purchaser of the collateral. Assignment requires prior consent of the CDC and the SBA.

Participation Requirements

Typically, a 504 project includes:

  • A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
  • A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture with a junior lien covering up to 40 percent of the total cost); 
  • A contribution from the borrower of at least 10 percent equity.

Additional Considerations

The dollar amount of a 504 loan request from a small business is combined with all outstanding 504 and 7(a) guaranty loan balances of that same business (including all affiliates) when determining the maximum SBA guaranteed amount that one borrower is permitted to have approved and outstanding. (SOP 50 10, Subpart A, Chapter 4, para. 2, page 96-1)

Program Funding Source

How to Apply

You must find a lender willing to loan money in participation with Certified Development Company (CDC). A CDC is a private, nonprofit corporation, set up to contribute to the economic development of its community. CDCs work with SBA and private sector lenders to provide financing to small businesses. You can initially contact a CDC for assistance or rely upon your lender to contact one for you. There are about 270 CDCs nationwide, and 17 CDCs in the State of Ohio, each covering a specific geographic area. You can get a CDC listing from your local SBA District Office or by pressing the link at the top of this page.

Links to Loan Application and/or Specific Information

Small Business Administration
Columbus District Office
401 N. Front Street, Suite 200
Columbus, Ohio 43215
614-469-6860

Go here for West Central Ohio SBA Participating Lenders

Go here for a list of Columbus District Certified Development Companies (CDC's)

Useful Information

Interest Rate Links

Business Management Links

Glossary of Important Financial Terms You Should Understand

How To Prepare A Business Plan to Obtain Money

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