How Do You Leverage the SBA CDC/504 Program to Finance Your Property?
The SBA CDC/504 loan program was designed with several goals in mind. For starters, it was created by the SBA to be a job creation program. Secondly, it was designed to encourage lenders to participate in industries that they would not normally lend in. Lastly, the program was set up to provide higher LTV financing options for small business owners. The last point is the most impactful because higher LTV loans also means smaller down payment requirements, which is important to small business owners for two reasons. Lower down payments than would be required in traditional banking structures draws more potential buyers into the market, and the lower down payments also help small business owners preserve capital that may be used in their businesses (a.k.a hiring more employees) instead of having that capital trapped in their real estate.
The impact on lenders is also tangible in that the structure of the SBA CDC/504 loan program is such that the lender is in a 1st lien position at 50% of the total project costs, with the SBA/CDC taking a 2nd lien position at up to 90% LTV (funded by a Certified Development Company – CDC). This attractive lien position entices the 1st lien lenders to participate in loan structures at LTV's that they would not normally consider because the SBA/CDC is taking the 2nd lien, riskier position. Small business owners can then typically expect to contribute 10% of the total project cost as a down payment (15% for special use properties).
So, the trick to leveraging the SBA CDC/504 program is to understand the requirements of the SBA, the selected CDC, and the lender. But don't be overly concerned about any perceived complexities of the program. Any good 504 lender will act as a guide and shepherd the small business owner through the entire application and funding process.
With this in mind, one might say that the real trick to leveraging the CDC/504 loan program is to work with a lender who really understands how to navigate through the process, and who has a history of successful closing with CDC offices.
There are some limitations with the SBA CDC/504 loan program, which include that it is only for real estate and/or certain types of major equipment, it can only be for properties where the business borrower/property owner occupies at least 51% of the property, and you must demonstrate that the business and business practices are sound.
It is also important to keep in mind that a good set of business projections combined with a solid business plan showing job creation and revenue growth as a result of the proposed SBA/CDC assisted financing is of the utmost importance in qualifying for this program.
In summary, the best way to leverage the SBA CDC/504 loan program is to work with a very experienced lender, demonstrate your ability to repay the loans as well as the how you can foster employment and grow your business.