A CDC/SBA 504 loan can be a valuable source of long-term, below market, fixed rate money for a small business. There are set specifications that dictate where and how you can spend any of the money that you receive from this loan type. They work by combining a loan from a non-profit Community Development Corporation (CDC) with a loan from a bank lender to create the perfect investment for small businesses. It is, in effect, two loans combined. By choosing to partner with a CDC, lenders are better able to offer a loan while minimizing their own collateral risk. Here’s everything you need to know about this type of loan.

What can you use a CDC/SBA 504 loan for?

Unlike other types of SBA loan, you have some strict criteria regarding how you can spend your money. Any loan amount that you receive from a CDC/SBA 504 loan can only be used to acquire fixed assets, although some soft costs may be permitted. The fixed assets can include:

  • Buying business premises.
  • Buying land or making improvements to existing land already purchased (including lighting, grading, parking, and utilities).
  • Constructing or modernizing existing business premises.
  • Industrial equipment financing.
  • In some cases, you may be allowed to use your loan for refinancing debt as part of your business growth.

You cannot use a CDC/SBA 504 loan to buy inventory or for debt consolidation. It can also not be used as working capital.

Who is eligible for a CDC/SBA 504 loan?

To be considered for this type of loan, there are some basic eligibility requirements. The more that apply to you, the more likely that you will receive this form of cash advance. To qualify, you must be:

  • A business that is already operating.
  • Making a profit.
  • US-based.
  • Have a lower net worth than $15 million, with a net income of the last two years less than $5 million.
  • Able to prove your need for the loan.

Your business will not be eligible for a CDC/SBA 504 loan if you do not meet these criteria. Additionally, some business types are excluded from applying. These are:

  • Non-profit companies.
  • Financial businesses such as banks and finance companies.
  • Life insurance companies.
  • Pyramid sales businesses.
  • Businesses with more than a third of their annual gross revenue coming from gambling.
  • Government-owned businesses.
  • Religious businesses.

What is the lending criteria for a CDC/SBA 504 loan?

As with any loan, there are going to be factors that determine your likelihood of being approved. The most critical factor is going to be your personal credit score and history. Make sure that you have addressed any issues with your credit before you start the application process. Your loan will also be assessed on:

  • The demand for your product or service.
  • Your previous earnings and your projected cash flow for the future.
  • Whether you are likely to be able to pay back the loan.
  • The likelihood of your business being a success.

The benefits of a CDC/SBA 504 loan

There are some very clear benefits for any business that is looking at this type of loan for financing options. Some of the benefits are more immediate, while others are focused on the long-term. Both have been designed to allow the business owner to focus more on the management of their company than having to worry about their interest rates on business loans. The benefits include:

  • Up to 90% financing
  • Lack of balloon payments, and longer loan amortizations
  • Fixed interest rates
  • Savings that will improve the cash flow of a business
“More entrepreneurs are looking to come back to start businesses, and that is where SBA is perfectly positioned to be helping more people to realize their dreams.”
Linda McMahon, Administrator of the SBA for the White House


How much can you borrow?

The highest amount that you can borrow with a CDC/SBA 504 loan is $5 million. Although not set in stone, it is generally considered a good rule of thumb that your business should be able to create or retain one job for every $65,000 that you borrow. For manufacturing companies that can increase, with an expectation of employment development for every $100,000. However, you may be exempt from the limitations on your loan amount if you suit the following criteria:

Community development: If your business is going to improve, diversify, or stabilize your local community, you may be able to borrow more money. If you are going to be stimulating the development of local businesses, then your restrictions on loan amount may be lifted.

Small companies need capital to invest, expand, and create jobs. And the economy needs a healthy small business community to bolster and sustain its recovery.”
Sam Graves, US Representative


Public Policy: If your business is expanding on its exports, you may be able to borrow more. You will also be eligible for higher borrowing amounts if you are female and you own and control your own business. Veterans and minorities hoping to borrow through a CDC/SBA 504 loan scheme will also be exempt from any financial limitations.

Will I need collateral for a CDC/SBA 504 loan?

In all cases, the purchases that you make with the money you receive will be classed as your collateral. If you have used your loan for equipment financing, that equipment will, therefore, become your collateral. In most cases, you will also need to provide a personal guarantee of at least 20% as well.

Duration of a CDC/SBA 504 loan

This year, the US Small Business Administration extended the time required to repay a CDC/SBA 504 loan. You can apply to have a repayment option of up to 25 years. This is the first time in more than 30 years that there have been changes to this loan scheme, with previous applicants being required to pay back the full cost of their loan in either 10 or 20 year terms. The SBA has created a special fund used solely for these longer loan durations, so there remains a full accessibility option for those small businesses that are looking at their application.

To Conclude

Small businesses very often overlook CDC/SBA 504 loans. The SBA (7a) loan program is much more popular, but that may change with the new 25-year loan repayment option. They are the better choice for those hoping to improve the local business ecosystem. With the many benefits afforded by the CDC/SBA 504 loan, it might be time that you looked at ways that your business can use this option to further its growth.

Tim Kelly