504 Loan Program

Definition

The 504 Loan Program is a financing option offered by the Small Business Administration (SBA) that provides long-term, fixed-rate financing to small businesses for the purchase of major fixed assets, such as real estate or equipment. It is designed to promote economic development and job creation by enabling small businesses to access affordable capital.

5 Must Know Facts For Your Next Test

1. The 504 Loan Program provides up to 40% of the total project cost, with the small business providing at least 10% and a lender providing the remaining 50%.
2. The maximum loan amount for a 504 loan is $5 million, or $5.5 million for certain energy-efficient or manufacturing projects.
3. The interest rate on a 504 loan is fixed and based on the current market rate for 5-year and 10-year U.S. Treasury issues, plus a small markup.
4. Eligible uses for 504 loan funds include the purchase of land and improvements, including existing buildings, construction of new facilities, or the renovation of existing facilities.
5. The 504 Loan Program is administered through a network of Certified Development Companies (CDCs), which are non-profit organizations that work with the SBA to provide financing.

Review Questions

• Explain the purpose and structure of the 504 Loan Program.
  • The 504 Loan Program is designed to promote economic development and job creation by providing long-term, fixed-rate financing to small businesses for the purchase of major fixed assets, such as real estate or equipment. The program is structured with the SBA providing up to 40% of the total project cost, the small business providing at least 10%, and a lender providing the remaining 50%. This arrangement allows small businesses to access affordable capital that they may not be able to obtain through traditional financing channels.
• Describe the role of Certified Development Companies (CDCs) in the 504 Loan Program.
  • Certified Development Companies (CDCs) are non-profit organizations that work with the SBA to administer the 504 Loan Program. CDCs are responsible for identifying eligible small businesses, structuring the 504 loan package, and issuing debentures to fund the loans. The debentures are backed by a guarantee from the SBA and sold to investors in the secondary market. CDCs play a crucial role in connecting small businesses with the financing they need to grow and create jobs.
• Analyze how the 504 Loan Program supports the goals of the Small Business Administration (SBA).
  • The 504 Loan Program aligns with the SBA's mission of supporting small businesses and promoting economic development. By providing long-term, fixed-rate financing for the purchase of major fixed assets, the program enables small businesses to access the capital they need to invest in their growth and expansion. This, in turn, helps to create jobs and stimulate local economies, which are key objectives of the SBA. The program's focus on economic development and job creation makes it a valuable tool for the SBA in fulfilling its role of supporting and empowering small businesses across the United States.

Related terms

Certified Development Company (CDC): A Certified Development Company is a nonprofit corporation that works with the SBA to provide financing through the 504 Loan Program. CDCs identify eligible small businesses and structure the 504 loan package.

Debenture: A debenture is a type of bond issued by a CDC to fund the 504 loan. The debenture is backed by a guarantee from the SBA and is sold to investors in the secondary market.

Collateral: Collateral is the asset, such as real estate or equipment, that is used to secure the 504 loan. The collateral is owned by the small business and must be sufficient to cover the loan amount.