Obligations Under a 504 Loan

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 typically structured as follows:

  • Approximately 50 percent of total funds will come from a bank or other private lender. The borrower will typically have to 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. The borrower will typically have to secure this instrument with a second mortgage
  • and personal guarantee.
  • 10 percent to 30 percent of an 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 startup businesses must contribute an equity investment of approximately 20 percent to 30 percent.

In addition to this 10 percent to 30 percent capital contribution, the borrower is 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 $35,000 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.

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.