What is the 504 Loan Program?
The 504 Loan Program is a
financing tool managed by the U.S. Small Business Administration (SBA) designed to provide small businesses with long-term, fixed-rate financing for major fixed assets. These assets typically include real estate, machinery, and equipment. The program aims to promote economic development and job creation by enabling businesses to expand or modernize their operations.
The third-party lender covers 50% of the project cost.
The CDC provides 40% of the project cost, backed by a 100% SBA-guaranteed debenture.
The small business borrower contributes 10% of the project cost.
This unique structure helps reduce the risk for lenders while providing businesses with the necessary capital at favorable terms.
Operate as a for-profit entity in the United States or its territories.
Have a tangible net worth of less than $15 million and an average net income of less than $5 million after federal income taxes for the preceding two years.
Demonstrate a need for the loan for a sound business purpose, such as purchasing real estate or equipment.
Loan Uses
The 504 loan can be used for various business purposes, including: Acquisition of land, including existing buildings.
Construction of new facilities or modernizing, renovating, or converting existing facilities.
Purchasing long-term machinery and equipment.
Refinancing of debt under certain conditions.
However, the funds cannot be used for working capital, inventory, or repaying, consolidating, or refinancing existing debt not related to fixed assets.
Advantages of the 504 Loan Program
The 504 Loan Program offers several benefits for small businesses: Long-term financing with terms up to 25 years for real estate and 10 years for equipment.
Fixed interest rates, which provide stability and help businesses plan their finances more effectively.
Lower down payments (typically 10%), allowing businesses to preserve cash for other operational needs.
Potential for substantial savings on interest payments compared to conventional financing.
Application Process
The application process for a 504 loan involves several steps: Determine eligibility and gather necessary documentation, such as financial statements and business plans.
Contact a Certified Development Company (CDC) to discuss your project and obtain guidance on the application process.
Submit a complete loan application package to the CDC, including all required documentation.
The CDC reviews the application and submits it to the SBA for approval.
Upon approval, the CDC works with the third-party lender to finalize the loan terms and disburse funds.
It’s essential to work closely with a CDC throughout this process to ensure a smooth and timely application.
Conclusion
The 504 Loan Program is a valuable resource for small businesses looking to invest in major fixed assets and drive growth. By offering long-term, fixed-rate financing with low down payments, the program helps businesses expand while preserving their cash flow. If you meet the eligibility criteria and have a clear need for the funds, the 504 Loan Program could be a strategic move to take your business to the next level.