One of the biggest challenges facing small business owners, next to starting a business, is taking it to the next level. Many seasoned entrepreneurs who successfully navigated around the pitfalls that cause early business failure are now ready to grow-and financing again is an issue. The U.S. Small Business Administration's (SBA) 504 loan program is designed to help small businesses at this juncture.
Also called the Certified Development Company (CDC)/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 and 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. In NH, there are five approved CDCs, three of which are statewide and two that operate in the southern six counties.
Most companies that qualify as small businesses can qualify for a CDC/504 loan. A company must meet specific SBA size standards: It must not have a tangible net worth of more than $15 million, and have an average net income of not more than $5 million after taxes for the two preceding years. Given the generous size standards, most businesses in NH qualify for the SBA 504 loan program. Additional eligibility requirements include that the business occupy the majority of the space of the completed facility and the company must be organized as a for-profit enterprise.
504 Requirements
The 504 project has three financing components:
A direct commercial loan from the private sector often provided by local banks and credit unions, 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-guaranty.
A contribution of at least 10 percent equity from the small business. If the project involves financing a start-up venture or a special-purpose building, then the equity contribution may be increased to between 15 and 20 percent, with the SBA component reduced accordingly. The CDC/SBA portion is fully amortized at a fixed rate for 10 years for equipment or 20 years for real estate.
This type of SBA loan has some specific requirements that businesses have to meet in order to qualify: they must meet job creation criteria or a community development goal, and a public policy goal. There are several economic development factors that, if met, allow the waiver of the specific job creation criteria.
The maximum SBA portion of the project is $5 million. For projects financing a manufacturing business or if the project is financing a facility that will result in a reduction of energy consumption or an increased use of sustainable designs, the maximum SBA portion is $5.5 million per project.
What You Can Finance
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; and
Purchasing long-term machinery and equipment.
Among the broad range of projects financed by NH companies using the SBA's 504 loan program are:
$1.1 million for building and equipment for an excavation firm;
$2.8 million for a hotel;
$6.8 million to expand a manufacturer;
$4.9 million for a retail furniture store;
$300,000 for an auto body shop;
$140,000 for a specialty grocer.
The 504 program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. SBA does offer other guaranteed loan products, through local lenders, to assist with financing for these business needs. 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. As with the SBA's more widely known 7(a) loan guaranty program, 504 loans are designed to help the small business owner be successful.
Greta Johansson is district director for the U.S. Small Business Administration in NH and Amy Bassett is deputy district director. For more information about SBA programs and services, visit www.sba.gov. For a complete list of participating lenders and certified development companies, visit www.sba.gov/nh.
Current Issue - April 2024