SBA

U.S. Small Business Administration

Champions of America's Entrepreneurs

The Facts About ...

Fixed-Asset Loans

Through the Section 504 Certified Development Company Program

The U.S. Small Business Administration enables growing businesses to secure long-term, fixed-rate financing for major fixed assets through its Certified Development Company Program. Commonly referred to as the 504 Program, it is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, such as land, buildings, machinery and equipment, or the building, modernizing, renovating or restoring of facilities. These assets must be used principally to enable the business to create or retain jobs.

Why 504?

Growing businesses have big plans, big ideas and big needs. When a conventional loan is not possible, a 504 loan may be the answer. The SBA's 504 program gives small business owners access to the same low-cost, fixed-rate, long-term financing that large businesses have through the bond markets.

What Is a 504 Certified Development Company?

Certified development companies are the key to the 504 loan. A CDC is a nonprofit organization sponsored by private interests or by state and local governments. Locally organized CDCs are set up to promote economic development in their communities. Certified by the SBA, they operate under the jurisdiction of a board that includes local government officials, private-sector lending institutions, and business and community organizations. There are almost 300 CDCs nationwide.

How Does a CDC Work?

CDCs help small businesses assemble the financing for fixed-asset projects by organizing the loan package, completing SBA paperwork, and then processing, closing and servicing the loans.

In a typical 504 loan package, at least 10 percent of the project's financing comes from the borrower, 50 percent from a private-sector lender, and the remaining share from the sale of debentures guaranteed by the SBA. These debentures are sold in the capital bond markets to raise the funds for the SBA portion of the project. The minimum equity injection of 10 percent is increased by 5 percent if the borrower's business is new or if the financing is for a limited- use asset. The increase is 10 percent if both factors apply.

The 504 Program provides permanent take-out financing for long-term assets. Bridge financing is usually required between the start of the project - which may include the purchase of land for later development - and receipt of funding from debentures and the first mortgage. (The SBA will not actually fund a debenture until the project is completed.)

Amount of the Loan

A CDC-financed project can be any size, but the SBA-backed portion of the loan package normally is limited to 40 percent of a project or $750,000 (up to $1 million in some cases), whichever is less. The minimum debenture is $50,000. While there are no limits to the project size, typical projects range in size from $500,000 to $1.5 million. The SBA requires that, for every $35,000 of debenture financing in the CDC's portfolio, an average of one job must be created or retained within two years of the project's funding.

                               Private                 504
                               Lender            Financing       Equity

%of project                  50%                     40%            10%
Security                  1st lien                   2nd lien
$ amount                  no limit            $50,000 - $1 mil.
Interest rate          variable or fixed            fixed
Real estate terms     10+ years              20 years
Equipment terms        7 years               10 years

Loan proceeds generally may be used for the following fixed-asset projects:

• Purchasing land and existing buildings, and making improvements such as grading, utilities, parking lots and landscaping;
• Constructing, modernizing, renovating or converting existing facilities; and
• Purchasing machinery and equipment that has a useful life of 10 years or more.
  

Terms

Interest rates are based on the current market rate for five- and 10-year U.S. Treasury issues, plus an amount slightly above the Treasury rate. Maturities of 10 and 20 years are available. Repayment is made in monthly, level-debt installments.

Collateral will usually include a mortgage on the land and buildings being financed; liens on machinery, equipment and fixtures; and lease assignments, as well as other assets. Private-sector lenders are secured by a first lien on the project. The SBA is secured by a second lien and, if needed, additional collateral. The agency also requires personal guaranties from those who own 20 percent or more of the company.

Fees

CDC fees for packaging and processing the loan cannot exceed 1.5 percent of the SBA's debenture. A monthly servicing fee, of not less than 0.625 percent and not more than 2 percent per year, is paid on the unpaid debenture balance to the CDC.

There are also fees to cover the cost of public issuance of securities and fees paid to the SBA for its guaranty.

Eligibility

An eligible business must be a for-profit corporation, partnership or proprietorship with a net worth (including any affiliates) of $6 million or less. Average net profits after taxes cannot exceed $2 million per year for the previous two years.

Bottom-Line Benefits for Commercial Lenders

There are a number of incentives for lenders to use the SBA's 504 Program. Lenders can -

• reduce risk by financing a smaller portion of the project while maintaining a first- lien position on 100 percent of the assets being financed.
• retain commercial-account relationships while participating in the long-term financing.
• make bigger loans; total financing can be $2.5 million or more.
• develop a secondary market in their first-mortgage portion.
• comply with the Community Reinvestment Act and extend legal lending limits.
• generate new business for years to come.
• broaden the community's tax base.
• stimulate the local economy through job creation and retention.
• save time - there's no SBA paperwork for the lender.
  

For More Information

Information is power. Make it your business to know what is available, where to get it and, most importantly, how to use it. Sources of information include:

U.S. Small Business Administration

• SBA District Offices
• SBA OnLine (electronic bulletin board)
• Business Information Centers (BICs)
• One-Stop Capital Shops (OSCSs)*
• Service Corps of Retired Executives (SCORE)
• Small Business Development Centers (SBDCs)
• U.S. Export Assistance Centers (USEACs)*
• Women's Business Centers (WBCs)* * Inquire at your local SBA office as to availability.
  

The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at 1-800-U-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640. For information on your rights to regulatory fairness, the telephone number is 1-800-REG-FAIR.

To access the agency's electronic public information services, you may contact:

SBA OnLine: electronic bulletin board (modem and computer required)

• 1-800-697-4636 (limited access)
• 1-900-463-4636 (full access)
• (202) 401-9600 (D.C. metro area)

• SBA home page: www.sba.gov
• SBA gopher: gopher.sba.gov
• File transfer protocol: ftp.sba.gov
• Telnet: telnet.sba.gov
• U.S. Business Advisor: www.business.gov
  

Other Sources of Information

• State economic development agencies
• Chambers of commerce
• Colleges and universities
• Libraries
• Manufacturers and suppliers of small business products and services
• Small business or industry trade associations
  

• maintained a guaranteed-loan portfolio of more than $29 billion in loans to 200,000 small businesses that otherwise would not have had such access to capital?
• backed over 49,400 loans totaling a record $10.9 billion to America's small businesses?
• made a record 2,700 investments worth $2.37 billion through its venture capital program?
• provided a record 50,000 loans totaling $1.1 billion to disaster victims for residential, personal-property and business losses?
• extended management and technical assistance to nearly 900,000 small businesses through its 13,000 Service Corps of Retired Executive volunteers and 950 small business development center locations?
• assumed a leadership role in the President's Welfare-to-Work Initiative by encouraging entrepreneurship and linking small businesses with potential employees?
  

• employ more than 50 percent of the private workforce,
• generate more than half of the nation's gross domestic product, and
• are the principal source of new jobs?
  
  

All of the SBA's programs and services are provided to the public on a nondiscriminatory basis.

FS-0070 (02/98)