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.

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.

For example: consider a hotel purchase for $5,000,000.
1) The bank will lend $2,500,000.
2) The CDC will lend $1,500,000-$2,000,000
3) The borrower will have to contribute $500,000-$1,500,000 in equity.

50% = Bank -- 1st Mortgage 40% = 504 Loan -- 2nd Mortgage 10% = Owner Cash ----------------------------------------- 100%

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.

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:
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. This means that you cannot prepay your loan for 10 years- prepayment penalties are as follows:

Year 1- 10% of loan principal
Year 2 – 9% of loan principal
Year 3 – 8% of loan principal
….
Year 9 – 2% of loan principal
Year 10 – 1% of loan principal
SBA fees total approximately three (3) percent of the debenture and may be financed with the loan, paid directly to the bank.

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 $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.

Various parts of this webpage are referenced from the Small Business Administration’s website.