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Section 504 Loan Program (CDCs)

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Section 504 loans are intended to help you avoid the large down payment and floating interest rates typically associated with the purchases of "brick and mortar" fixed assets. You'll want to fully understand the financial commitment necessary to obtain this loan.

The SBA 504 Loan Program provides long-term and fixed rate financing for investment in fixed assets. The loans are intended to help small and medium-sized businesses avoid large down payment and floating interest rates typically associated with the purchases of "bricks and mortar" fixed assets. The program is also aimed at aiding local economies by increasing employment opportunities and the loans are tied to certain job creation mandates. 

Qualifying for Section 504 Loans

The majority of these loans are obtained by existing businesses looking to expand their operations. Startups occasionally use Section 504 if the type of business involves property ownership such as a manufacturer that determines it would be cheaper to purchase real estate than to lease and possibly face relocation expenses, or a business that has a relatively low initial risk, and a significant equity base that reflects a long-term commitment. 

The program is also tied to job creation and typically a borrower is required to either create or retain one job for every $50,000 of total project cost.

Working with Certified Development Centers

Section 504 loans are extended through SBA-approved companies called Certified Development Companies (CDCs). A CDC is a private, nonprofit corporation set up to contribute to the economic development of its community or region.

Typical 504 loans range in size from $500,000 to $4 million, with loans averaging in at around $1 million. The total size of projects using CDC financing is unlimited, but, as with SBA loan guarantees, the maximum SBA loan amount for any individual project is $4 million for manufacturers or $1.3 million for some public projects.

Participants in a CDC include banks, utilities, professional organizations, community groups and private investors. For banks in particular, lending through a CDC is an opportunity for them to meet their bank regulatory requirements for community lending while spreading the risk from those investments among the separate CDC corporate members.

The bank also need not consider their CDC participation against their loan loss reserves. CDCs can also minimize risks by selling 100 percent SBA-guaranteed debentures to private investors in amounts up to 40 percent of a project, or $750,000, whichever is less. 

Finally, CDC investing by banks creates an attractive loan-to-value ratio. The bank usually contributes only about 50 percent of the CDC loan proceeds, yet is given a priority claim against the value of the project or collateral.

Before launching full-force into a 504 application or busting down the doors of a local CDC, read the details of the 504 program.

Section 504 Loans for Asset and Real Estate Acquisitions

Most 504 loans can be obtained for "bricks and mortar" type expenditures, including:


  • purchasing existing buildings
  • purchasing land and land improvements such as grading, street improvements, utilities, parking lots and landscaping
  • purchasing machinery and equipment that will have a useful life of at least 10 years

Physical Updates

  • construction
  • modernizing, renovating or converting existing facilities
  • financing a construction contingency fund

Interest and Select Professional Fees

  • paying interest on interim financing
  • paying professional fees directly attributable to the project, such as surveying, engineering, architect, appraisal, legal and accounting fees

Traditional 504 loans cannot be used for:

  • working capital or inventory

  • short-term needs

  • consolidating or repaying debt

  • refinancing

  • or financing a plant not located in the U.S., its territories and possessions

You can use 504 Refinance Loans for the purposes listed above.

Complying with 504 Eligibility Guidelines

Eligibility for a 504 loan requires, in addition to the general eligibility requirements for a SBA Section 7(a) loan, small business must:

  • be a for-profit corporation, partnership or sole proprietorship
  • have a tangible net worth of not more than $15 million
  • show after-tax average net income during the last two years of $5 million or less

Abiding by 504 Obligations

Typically, a 504 loan from a Certified Development Company (CDC) requires some financial contribution from the small business before the CDC will provide funding. Contributions to a CDC loan are usually structured in a three-tier approach:

  • Approximately 50 percent of total funds will come from a bank or other private lender. You must typically secure this loan with collateral such as a first mortgage and possibly a personal guarantee of at least the principal amount.
  • Approximately 40 percent will come from an SBA loan instrument. You must typically secure this instrument with a second mortgage and personal guarantee.
  • 10 percent to 30 percent of equity contribution will come from the small business. The small business's claim must be subordinated to the above-two priority lenders. Established businesses usually are required to contribute about 10 percent, while start-up businesses may be required to contribute an equity investment of approximately 20 percent to 30 percent.

In addition to this 10 percent to 30 percent capital contribution, you are also required meet the general criteria for SBA loan guarantees, and to:

  • pledge that at least one job is to be created or retained for every $50,000 of total project cost.
  • show evidence of an existing cash flow sufficient to repay the additional debt, and the loan must be secured by collateral
  • pay processing and legal fees

Knowing Your Interest Rates

Interest rates usually differ for each tier of borrowed money:

  • the bank, or private lender's, portion of the loan bears the interest rate set by the lender. 
  • the SBA's portion of the loan contribution has interest rates based on the current market rate for five- and 10-year U.S. Treasury issues, plus an increment above the Treasury rate, based on market conditions (maturities of 10 and 20 years are available)

Repayments are made in monthly, level-debt installments. Collateral may include a mortgage on the land and the building being financed, liens on machinery, equipment and fixtures and lease assignments. Private sector lenders are secured by a first lien on the project. The SBA is secured by a second lien.

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