Opinion: SBA 504 loans finance small business growth

By now you are probably a seasoned entrepreneur who has successfully navigated the pitfalls that cause early business failure. You’re ready to grow, and financing again is an issue.

Enter the SBA 504 loan program, especially designed to help small businesses at this juncture.

Also called the Certified Development Company/504 Program, this is a long-term financing tool for economic development within a community. It provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land, buildings, machinery and equipment.

CDCs are nonprofit corporations set up to contribute to the economic development of their communities. They work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. Each CDC covers a specific geographic area.

Most companies that qualify as small businesses can qualify for a CDC/504 loan. Companies must meet specific SBA size standards: they must not have a tangible net worth of more than $7 million, and not have an average net income of more than $2.5 million after taxes for the two preceding years.

The 504 project has three components:

• a direct commercial loan from the private sector covering 50 percent of the project and secured by a senior lien;

• a loan secured with a junior lien from the CDC covering up to 40 percent of the cost and backed by a 100 percent SBA-guaranteed debenture; and

• a contribution of at least 10 percent equity from your business.

This type of SBA loan has some specific requirements that businesses have to meet in order to qualify: they have to meet job creation criteria or a community development goal, and public policy goals.

The maximum SBA portion is $1.5 million for 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.

The maximum SBA debenture is $2 million for 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

• Enhanced economic competition

• Restructuring because of federally mandated standards or policies

• Changes necessitated by federal budget cutbacks

• Expansion of small business concerns owned and controlled by veterans

• Expansion of small business concerns

New provisions signed into law in December 2004 created a new category of 504 loans to “small manufacturers,” with a maximum SBA guarantee of $4 million. The criteria to qualify for these loans include creation or retention of at least 1 job per $100,000 guaranteed by the SBA, and that all production facilities be located in the United States.

Growing your business may, and usually does, involve spending in several different areas. Funds under the 504 program, however, can only 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.

As with the SBA’s more widely known loan guaranty program, 504 loans are designed to help the small-business owner be successful. 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. Fees total approximately 3 percent of the debenture and may be financed with the loan.

For more information about SBA programs and services, visit www.sba.gov.

Sam Jones is Region 7 administrator of the U.S. Small Business Administration, serving Missouri, Kansas, Iowa and Nebraska.