Section 504 program
The intent of the SBA Section 504 program (Section 504 refers to the part of the Small Business Act that authorizes this loan program) is to provide growing businesses with long-term, fixed-rate financing for the purchase of major fixed assets, including buildings and land. Money is provided by the SBA to Certified Development Companies (CDCs), which are nonprofit corporations created to spur economic development in their communities. If you want a loan under this program, you need to apply directly to the appropriate CDC. CDCs are usually comprised of community groups, banks, utilities, private investors, and professional organizations. By banding together, these organizations spread out the burden of risk if an investment goes bad.
The maximum SBA participation (the most the agency can contribute to the loan) is limited to $1 million, or $1.3 million for meeting a public policy goal. Public policy goals include
- Business district revitalization
- Expansion of exports
- Expansion of minority business development
- Rural development
- Enhanced economic competition
- Restructuring because of federally mandated standards or policies
- Changes necessitated by federal budget cutbacks
- Expansion of small-business concerns owned and controlled by veterans
- Expansion of small-business concerns owned and controlled by women
The SBA generally requires a business receiving a Section 504 loan to create or retain one job for every $35,000 provided by the SBA.
Section 504 funds may not be used for working capital or inventory, consolidating or repaying debt, or refinancing debt. Section 504 funds are intended for use on bricks-and-mortar and fixed-asset projects, such as
- Purchasing long-term machinery and equipment
- Constructing new facilities
- Renovating or modernizing existing facilities
- Purchasing land and improvements
Loan terms are either 10 or 20 years, and the interest rate is set at an increment above the current market rate for five-year and ten-year U.S. Treasury issues. Project assets (including machinery, equipment, and other capital items) are usually pledged as collateral for the loan, and the principal owners are also required to sign personal guaranties.