What is the 504 Loan Program?

The 504 Loan Program is a fixed asset financing program for expanding small businesses. It is the first federal financing tool to recognize the importance of small businesses in the job creation process through their physical plant expansions. The "504" is the Economic Development Program of the U.S. Small Business Administration (SBA).

What does the 504 Loan Program do?

Small businesses, inherently unable to tap into the long-term capital market, can do so with the 504 loan. Terms and conditions more suited to the needs of small business are possible. The structure of 504 loan financing supplements private sector financing from conventional lending sources.

What are the programs distinguishing features?

a) Typically 50% of a project's financing comes from a private financial institution. This is a conventional (non-SBA guaranteed) bank loan secured by a first lien so that each 504 loan leverages a minimum of 50% private capital.

b) A maximum of 40% comes from a Certified Development Company and is known as the "504" loan. The 504 loan carries a fixed, below market interest rate, with a term of 20 years for real estate and 10 years for stand alone equipment. It is typically secured by a second lien. The minimum 504 loan is $50,000. The maximum is $1,500,000, but may be increased to $2,000,000 for projects that meet the SBA’s public policy guidelines and may go as high as $4,000,000 for small manufacturing firms.

c) A minimum of 10% comes from equity. Conventional financing normally requires a small business to provide at least 20% equity. The 504 structure frees up additional cash for productive working capital purposes.

d) Most importantly, every project financed with 504 financing results in the retention or creation of one full-time permanent private job for each $50,000 of 504 funding in the project, or has an altemative explicit economic impact on the local economy.

What are Certified Development Companies?

Certified Development Companies are local public/private partnerships organized as non-profit community based corporations that provide 504 financing to local small companies. They are "Certified" by the Small Business Administration to offer 504 loans to eligible small businesses. SBA guarantees the development companies' 504 loans. This loan program has the lowest default and loss rate of any of SBA's financing programs.

Certified Development Companies are staffed with professionals who work directly with small businesses. These professionals market, package, process, close and service 504 loans and many CDCs offer and implement other economic development programs in their areas of operation. There are over 270 Certified Development Companies nationwide.

If you have any questions or would like additional information on the 504 Loan Program, please contact REDCO, your local Certified Development Company.