There are several different loan programs that have been generated by the United States federal government as a way to provide financing for different types of businesses. The SBA 504 loans are offered by the Small Business Administration and are sometimes known as a Certified Development Company program loan.
The basic issues that SBA 504 loans are designed to assist business with is to allow the business to have the funds to invest in fixed assets. A fixed asset is a general term that can include several different categories but at the broadest level include real estate purchases, buildings on property as well as machinery. These purchases are made below market rates to ensure that there is equity available in the investment.
How SBA 504 Loans Work
One of the unique features of SBA 504 loans is that there are actually three entities involved in each loan. This includes the business, which is required to invest a minimum of 10% of the total amount, a bank investing at 50% and 40% provided by a Certified Development Company.
The bank in the loan can be any conventional lender or financial institute while the Certified Development Company is usually a local, non-profit company that has been created just to encourage this type of lending for additional business growth. The bank, as the major investor, has the primary lien and the Certified Development Company holds a second lien. These are removed when the loan is repaid in full.
Specifics
The maximum amount of SBA 504 loans is five million dollars for most businesses however, those in energy related fields or those businesses designated as manufacturing businesses can borrow up to 5.5 million. There are also some specifications for businesses about how much they have to put up for the project with some businesses needing to increase to 15%.
There are actually very few eligibility requirements or restrictions on SBA 504 loans which is why they are a good option for many small businesses to consider. You will need to have a business income, after taxes, of less than 5 million dollars in the last two years, be investing in a project that is greater than the assets of the business and the principals to the business, and not have a tangible business net worth of over $15 million.
