What Are 504 SBA Loans?
The Small Business Administration (SBA) serves the specific purpose of helping entrepreneurs to succeed in the business world. It does so by offering guidance, resources, loans and grants to those who have started or are starting small businesses. Of the various types of loans the SBA offers, one is called a 504 or Certified Development Company (CDC) loan.
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Identification
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The CDC, according to the SBA website, is "a private, nonprofit corporation set up to contribute to the economic development of its community." These Certified Development Companies work with the SBA to increase business and service opportunities for specific underprivileged communities and demographic groups.
Purpose
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The SBA primarily uses loans in the CDC/504 program to help companies that have the capacity to contribute significantly to a specific community's economic development. For this reason, only "brick and mortar" businesses are eligible. A "brick and mortar" business is a more traditional style of business, usually having an actual store front, as opposed to an online business that will probably have little or no recognizable presence in a community. Investing in "brick and mortar" companies in this way helps to ensure that they will bring jobs, revenue and economic health to a particular community. For this reason, the SBA generally favors in companies based in economically disadvantaged areas for its CDC/504 loans.
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Requirements
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Aside from being a "brick and mortar" operation, a company must also have the express purpose of gaining profit in order to qualify; non-profit organizations cannot get CDC/504 loans. In addition to this, certain monetary limitations apply. First, the company must have less than $7.5 million in total assets and have an average net income of less than $2.5 million. Any company possessing or making more than this is too big to qualify. Second, once a business does get a CDC/504 loan, it has to use it on qualifying projects. These include things that enhance and build upon the "brick and mortar" nature of the company, such as to purchase or improve real estate or to purchase machinery and equipment.
Features
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On top of the limitations that exist for these loans, the borrower must pay for 10 percent of the total amount needed for the project, according to the SBA website. With this portion coming from the borrower, 40 percent of the necessary funding comes as a loan from a CDC and 50 percent comes as a loan from a conventional financial institution, such as a bank or venture capitalist firm. The interest rate for the CDC portion of the loan comes at an increment above the current market rate, with a payment schedule of 5 to 20 years.
Benefits
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The CDC/504 Loan Program is beneficial for small businesses because it allows them to access funds that they probably would not be able to access otherwise. As the required collateral is usually the equipment or property to be financed, businesses do not need to have extensive assets in order to qualify.
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References
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