CDC/504 Loans

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CDC/504 Loans are a financial instrument designed to promote economic development and job creation by providing small businesses with long-term, fixed-rate financing for major fixed assets such as land, buildings, and equipment. Administered by the U.S. Small Business Administration (SBA), these loans are a viable option for small business owners looking to expand or modernize their operations.

CDC/504 Loan Eligibility Criteria

To qualify for a CDC/504 loan, businesses must meet specific requirements:
  • Be a for-profit business
  • Have a tangible net worth of less than $15 million
  • Have an average net income of less than $5 million after taxes for the preceding two years
  • Plan to use the financed property primarily for its operations, meaning at least 51% of the building must be occupied by the business
  • Be located in the United States or its territories

Loan Structure

The structure of a CDC/504 loan typically involves three parties:
  1. A Certified Development Company (CDC), which provides up to 40% of the loan amount
  2. A third-party lender, often a bank, that provides up to 50% of the loan amount
  3. The borrower, who contributes a down payment of at least 10%

Benefits of CDC/504 Loans

  • Long-Term Financing: These loans offer terms of 10, 20, or 25 years, reducing the monthly payment burden on the borrower.
  • Fixed Interest Rates: Borrowers benefit from fixed interest rates, making it easier to predict monthly payments and manage finances.
  • Lower Down Payments: The required down payment is typically lower than traditional loans, making it more accessible for small businesses.

Application Process

Applying for a CDC/504 loan involves several steps:
  1. Prequalification: Start with a prequalification process to determine eligibility, which involves reviewing the business’s financial statements and credit history.
  2. Loan Application: Complete a detailed application with the assistance of a CDC. The application will require information about the business, its owners, and detailed financial data.
  3. Approval and Closing: Once approved, the loan proceeds to closing. The CDC, third-party lender, and SBA will all be involved in this process.

Use of Funds

The funds from a CDC/504 loan can be used for various purposes, such as:
  • Purchasing land or existing buildings
  • Constructing new facilities or modernizing existing ones
  • Purchasing long-term machinery and equipment
However, these funds cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing (except in specific circumstances).

Conclusion

CDC/504 loans can be a pivotal resource for small businesses looking to expand or upgrade their facilities, offering favorable terms, fixed rates, and lower down payments. It is essential to understand the eligibility criteria, application process, and use of funds to determine if this financing option aligns with your business goals and needs. For further details or personalized advice on CDC/504 Loans and other financing options for small businesses, consider consulting with a financial advisor or reaching out directly to the Small Business Administration or a Certified Development Company in your area.

FAQ

A CDC/504 Loan is a long-term, fixed-rate financing option for small businesses looking to acquire major fixed assets for expansion or modernization. It is facilitated by Certified Development Companies (CDCs), which are nonprofit corporations certified and regulated by the SBA.

Funds from a CDC/504 Loan can be used for the purchase of land, construction of new facilities, purchasing existing buildings, and purchasing long-term machinery and equipment. They cannot be used for working capital or inventory.

Loan amounts can vary, but the maximum SBA debenture is generally $5 million. Certain projects like manufacturing or energy-efficient improvements can qualify for up to $5.5 million.

Interest rates for CDC/504 Loans are fixed and tied to U.S. Treasury rates. They are typically below market rates and are very competitive.

Loan terms are typically 10, 20, or 25 years, depending on the use of proceeds and the useful life of the assets financed.

Borrowers typically must contribute 10% of the project cost, while the CDC finances 40% and a third-party lender covers 50%.

Yes, there are fees involved, including a CDC processing fee, a SBA guarantee fee, and a funding fee. However, these fees are often rolled into the loan amount.

Businesses must be operated for profit, meet size standards set by the SBA, have a tangible net worth of less than $15 million, and an average net income of less than $5 million after taxes for the preceding two years.

You can start by contacting a CDC in your local area. They will guide you through the application process and work with you and a third-party lender to assemble the loan package.

Unlike the 7(a) loan program which is more general-purpose, CDC/504 Loans are specifically aimed at helping small businesses with major asset purchases. They offer low down payments and long-term, fixed-rate financing, which can be beneficial for businesses looking to stabilize occupancy costs.

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