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Editor’s Note: This blog post has been updated to reflect February 2017 new SBA programs and regulations.
Going Beyond 7(a): The SBA’s Lesser-Known CDC/504 Program Vital for Buying Fixed Assets
When companies seeking loans think about the federal Small Business Administration (SBA), the agency’s flagship 7(a) loan program usually comes to mind. That’s because 7(a) is a versatile and flexible option. It can be used for operational expenses, real estate deals, debt refinancing and seasonal financing, to name a few things.
That’s all well and good, but what if you need financing for major fixed assets, such as equipment or larger chunks of real estate?
Enter the SBA’s CDC/504 program
Originally a temporary measure included in the Small Business Jobs Act of 2010, Congress didn’t make the program a permanent one until late 2015. That renewal made available up to $7.5 billion in loans, with $5 million being the single largest loan available (an additional $500,000 is available when energy reduction or alternative fuels public policy goals are met).
So, what can you do with a CDC/504 program loan?
Loan proceeds can go toward buying land, including existing buildings; renovating existing facilities or building new ones; implementing property improvements, such as grading or landscaping; and obtaining heavy machinery and equipment. And first things first: For a business to be eligible, it must operate as a for-profit, have a tangible net worth of less than $15 million and average net income less than $5 million after taxes for the prior two years. Would-be borrowers that have funds available from other sources are ineligible.
Limits on the loan
That said, there are some limitations. Loan recipients can’t use the money to consolidate debt, speculate or invest in rental real estate or have it serve as working capital. Nonprofits are ineligible, as are companies that promote religion, consumer and marketing cooperatives and speculative businesses.
As is typical of the SBA – perhaps the most unappreciated federally-backed program – the loans are a good deal. You may receive terms of 10 to 20 years to pay off the loan, while interest rates hover in the 6-percent range. There’s a 3-percent fee up front (which can be financed as part of the loan),and you’ll have to put some skin into the game with 10 percent down in the form of collateral.
Of the remaining 90 percent of the loan, 40 percent is provided by a Certified Development Company (CDC). A CDC is an SBA-certified and regulated nonprofit that supports and promotes economic growth in their local area by working with participating lenders. There are 270 CDCs nationwide.
A conventional lender makes the other half of the loan and also takes the first lien position. As mentioned before, the amortization period for that portion of the loan is at least 10 years and could be twice that long. Some borrowers might worry about the lender being in the first lien position, but that shouldn’t be cause for concern. As the loan is backed by real estate or other tangible assets, loan rates will be favorable because of the relatively low risk.
Do your homework
Go ahead and check with other lenders. In all probability, the SBA rate will be lower and the repayment period longer, while the down payment could be about half of what a bank will seek.
Assuming you’re now convinced, let’s talk about the cumulative impact – your business will ultimately save money. And a smart business will take that money and find other uses for it, such as adding a new product line or service, hiring employees or bolstering the advertising/marketing/public relations budget. While it may not be as well-known as its 7(a) cousin, the CDC/504 program is growing in popularity – and may grow in size, too.
On Feb. 9, U.S. Sen. Cory Gardner, R-Colorado, and Sen. Chris Coons, D-Delaware introduced the Investing in America’s Small Manufacturers Act in Congress. They say the legislation would increase the number of affordable loans available to small manufacturers through SBA the Small Business guarantee programs.
That can only be good news and shows the value of the CDC/504 program.
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