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It’s possible by using the SBA’s 504 Loan program, one of the Fed’s best-kept secrets. These special loans provide long-term (10-20 years) financing to small business for the purchase, construction, and renovation of buildings and can be used to fund large equipment purchases. 

Besides the long loan terms, other advantages are a low down payment, typically only 10 percent, and a competitive interest rate fixed over the life of the loan.  504 loans are arranged by regional Community Development Corporations (CDCS) who partner with traditional commercial lenders, mostly banks, to provide these long-term loans.  Borrowers work directly with CDCs to apply, close, fund and service their loans. A private lender typically provides up to 50 percent of the funding, the SBA provides up to 40 percent (up to $1,000,000), and the business provides 10 percent.

Here’s how a typical project might be put together:

Although 504 loans cannot be used for working capital, because of the lower down payment requirements they can help you save funds for later working capital needs.

The 504 program exists to help the community by helping small business to create jobs or in other ways benefit the community. You’ll need to document how your project will either create jobs (one job per every $50,000 of CDC dollars) or how it will otherwise benefit your local community.  Here’s a list of other eligibility requirements:

• Organized as a for-profit business.
• Legal entity-corporation, partnership, sole proprietor, limited liability company.
• Any type of legitimate business- manufacturing, wholesale, service, distribution, professional service or retail.
• Located in or planning to locate in any area of the United States.
• Small business - either: net worth under $7 million & net profits after taxes under $2.5 million or meet SBA's other size standards.
• Planning to use the loan proceeds for capital investment (land, building, leasehold improvements, renovation, construction, machinery & associated soft costs). 504 loans are not working capital loans.
• Another lender must be willing to participate in the financing. The SBA 504 loan finances up to 40% of the total project cost and the other lender finances 50%. The business or its owner typically puts in 10%.
• Owner-user of the project being financed (51% occupancy if existing building; 60% occupancy if new construction) Two or more unrelated small businesses may receive a 504 loan to buy or construct a building as long as they, together, will occupy at least 51% an existing building or 60% of new construction.

Concerned about excess paperwork and long time delays?  The CDC requires the same basic information that a bank does and offers a timely turn-around on applications. You’ll start by talking to your local CDC officer about your project and your local banker to see if they are interested in participating.

How are they able to offer the lower rates and smaller down payments? SBA 504 loans are pooled together and sold as 20-year bonds to large corporate and financial investors in the New York securities market. It is these bonds, carrying the guaranty of the US government, that enable investors to accept a lower interest rate since they cannot lose their principle.  This is exactly the same way giant corporations borrow money from “the markets” rather than their local banks.

For more information, start with the National Association of Development Companies’ website at www.nadco.org.  The SBA’s Web site, www.sba.gov is also great source of information about the 504 loan program.