This post is part of a series of posts designed to help you acquire a loan for your small business. The following posts cover methods for public financing of your small business

Certified Development Company Loans or 504 Loan Program

Offered through the Small Business Administration, the 504 loan program makes joint federal and private-sector financing available to small businesses. The purpose of the program is to stimulate growth and expansion of small businesses within cities, regions and states having an SBA-approved Certified Development Company, thereby creating more jobs, increasing the local tax base, and expanding business ownership opportunities.

This program provides long-term fixed-asset financing for small businesses. This type of loan is made by a Certified Development Company (CDC) in conjunction with a second loan from a commercial lender in order to meet a majority of the total financing requirements of a specific project. An eligible project’s purpose is to assist small businesses with financing plant acquisition, construction, conversion or expansion including acquisition of land, existing buildings and leasehold improvements for an identifiable small business, and machinery and equipment with a minimum 10-year economic life. Loan proceeds cannot be used for working capital or debt repayment. Financing for the 504 program is provided jointly by the federal government and the private sector. The CDC loan amount will vary between 30 and 40 percent of the total project, not to exceed $1.5 million on most loans, but under specific circumstances for small manufacturers, rural areas, and to meet certain public policy goals, it may go as high as $5.5 million, with the balance coming from non-governmental sources. Usually, 50 percent is lent directly by a bank and 10 to 20 percent originates from the applicants themselves. The CDC obtains its funds from the sale of a debenture, which is fully guaranteed by the SBA, and then again lends these funds to the borrower. Maturities of debentures are for 10- and 20-year periods. The useful life of the asset determines the term of the debenture. The interest rate is set at the time of the sale of the debenture. The benefits of this program are a favorable interest rate mix and a longer pay back period.

This program has certain unique requirements such as a measure of economic impact through the job generation potential of each project, so it is recommended that any interested party discuss the application directly with the 504 company serving its area.

A list of Certified Development Companies is available from the Minnesota Center for Community Economic Development or the Minnesota Department of Employment and Economic Development. Both addresses and telephone numbers can be found in the Resource Directory section of this Guide.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.