CDC/504 Loan Program is Financing Option for Manufacturers

By Guest Writer Linda Kindrick, Executive Director of the Montana Community Finance Corporation

Is your business located in a leased building? Are you tired of collecting rent receipts every month, instead of building equity? Is your present building too small and business growth hampered by close quarters? Would you like to be able to get into your own building with as little as 10% down? Does a 20-year term note with fixed rate financing sound good to you? If you answered yes to any, or all, of these questions, read on!

The U.S. Small Business Administration offers a loan program called the 504 loan program. The CDC/504 loan program is a long-term financing tool for economic development within a community. It provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. The primary purpose of the program is jobs creation, with one job to be created for every $50,000 of debenture 1 loaned to the eligible small business. CDC is the Certified Development Company, a nonprofit corporation set up to contribute to the economic development of its community that works with the SBA and private-sector lenders to provide financing to small businesses.

Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business.

Proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities; modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.

While the majority of loans under this program are limited to $2.0 million for the debenture part of the project, loans to qualified manufacturers can have debentures as high as $4.0 million. Taking into account the debenture covers only 40% of the total project cost, this could equate to total project financing of $10 million. To qualify for this larger loan amount, the manufacturer must fall under Sectors 31, 32 or 33 of the North American Industrial Classification System, have all its production facilities located in the U.S. and create or retain at least one job per $100,000 guaranteed by the SBA or meet a public policy goal.

The 10% down feature is attractive in that it lets a company retain valuable cash for operating needs and staffing, an important component to a manufacturing business. The fixed rate financing offered on the debenture helps you budget for the known payments each month. The lender’s portion of the project is normally offered on commercially reasonable terms, which may include a variable interest rate.

Montana Community Finance Corporation, an economic development entity in existence since 1984, is located in Helena, MT. The staff of MCFC is willing and able to work with you and your lender in providing a financial package to help you acquire or improve your own facility. The 504 loan program is a powerful tool for your business and for the state of Montana’s economy. To learn more about how this program may work for you, check out the website www.mtcommunityfinance.org or call Linda Kindrick at 443-3261 (email Linda@mtcommunityfinance.org).

1) "Debenture" is the document the Certified Development Company signs, guaranteed by the Small Business Administration, grouped together with other debentures around the country, and sold on the secondary market to investors