The U.S. Small Business Administration's 504 program is intended to create jobs based upon a formula that has been modified several times over the years.  Particular preference is given to rural, economically disadvantaged areas and minority and female applicants for which SBA may waive the job creation requirement.  The loan proceeds must be used to finance long-term assets such as real estate and fixtures which makes the program ideal for construction, for expansion of manufacturing facilities and other job intensive structures.

LOAN AMOUNT

Typically $250,000 and up.  Because of the complicated processing, lower loan amounts are often relegated to other loan programs and higher amounts may be too risky for most lenders.  504 loans are processed by SBA-licensed Certified Development Corporations (CDC).  The CDC creates a SBA guaranteed subordinated debenture (similar to a 2nd mortgage).  The debenture, up to $1.5 million ($4 million for manufacturing) is piggy-backed with a conventional first mortgage of any amount.  It's usually provided by a local bank.  The borrowing Small Business Concern (SBC) makes one payment to the CDC which is then proportionately paid to the bank and to the trustee for the debenture holder.

INTEREST RATE

The debenture rate is fixed at closing at a rate close to treasury securities of like term.  Banks may charge a fixed or floating market rate for their conventional portion along with points and fees.  The result is a blended rate to the SBC.  The CDC also charges fees.

TERM

The SBA portion is usually 20 years and the conventional portion is usually 10 years.

SUITABLE BORROWERS

For-profit SBCs with a history of success in the same industry for which the funds are to be used.  There are some company size and industry type exclusions.

LOAN TO COLLATERAL VALUE OR COST

Up to 90% of the cost for existing SBCs, 85% for start-ups.  A classic percentage approved by SBA is where the bank's conventional loan is 50%, the debenture is 40% and the SBC provides 10% or more.  An example financing of a $1,875,000 plant expansion might look like this:

• $750,000 -- SBA Subordinated debenture @ 6% fixed for 20 years.
• $937,500 -- Bank conventional loan @ 8%, 10 years adjustable every 3 years.
• $1,687,500 -- Total loan @ blended rate and term.

• $187,500 -- Minimum cash requirement from SBC
• $1,875,000 -- Total plant expansion