======504 Loan Program====== The 504 Loan Program (also known as the CDC/504 Loan Program) is one of the flagship financing tools offered by the U.S. [[Small Business Administration]] (SBA). Think of it as a powerful partnership designed to help small businesses grow by making it easier to purchase major fixed assets, such as real estate or heavy equipment. Unlike a traditional bank loan, a 504 loan splits the financing between three parties: a conventional lender (like a bank), a non-profit [[Certified Development Company]] (CDC), and the business owner. This structure significantly reduces the down payment required from the entrepreneur, often to just 10% of the project cost, while also providing a long-term, fixed-interest rate on a large portion of the loan. The program's core mission is to foster economic development and job creation, making it a win-win for the business and the community. For investors, understanding this program can offer insight into the health and growth potential of small-cap companies that leverage it. ===== How the 504 Loan Program Works ===== The magic of the 504 program lies in its unique three-part structure. It’s a collaborative effort that shares the risk, making lenders more willing to say "yes" to a small business's big plans. ==== The Three Key Players ==== Imagine a project to buy a $1 million commercial building. Here’s how the financing would typically break down: * **The Conventional Lender (The Bank):** The bank or credit union provides the largest chunk of the financing, typically 50% of the total project cost ($500,000 in our example). In return for taking on this senior debt, the bank gets the first [[lien]] on the asset, meaning they are first in line to be repaid if the business defaults. * **The Certified Development Company (CDC):** The CDC, a non-profit organization certified by the SBA, provides up to 40% of the financing ($400,000). This portion of the loan is 100% guaranteed by the SBA, which is why it comes with a favorable, long-term, fixed interest rate. The CDC holds a second lien on the asset. * **The Small Business Owner:** The entrepreneur makes a down payment, or [[equity]] injection, of as little as 10% of the total cost ($100,000). This is significantly lower than the 20-30% often required for conventional commercial loans, freeing up precious capital for other business needs. ==== What Can You Finance? ==== The 504 loan is specifically designed for financing long-term, fixed assets. It’s not for day-to-day expenses. === Eligible Uses === * Purchasing land and existing buildings. * Construction of new facilities or modernizing, renovating, or converting existing ones. * Buying machinery and equipment with a long useful life (typically 10+ years). * Refinancing debt in connection with an expansion project. === Ineligible Uses === * [[Working capital]] or inventory. * Consolidating or repaying other debts (unless it's part of a larger expansion project). * Investing in rental real estate for passive income purposes. ===== The Value Investor's Perspective ===== While the 504 program is a financing tool for business owners, it offers valuable signals for investors analyzing small businesses. A company that has successfully secured a 504 loan has passed a rigorous vetting process by a bank, a CDC, and the SBA. ==== A Tool for Building Long-Term Value ==== From a value investing standpoint, the 504 program helps a business build a solid foundation. By locking in a long-term, fixed-rate loan, a company stabilizes one of its biggest expenses—its facility or equipment costs. This financial stability is a huge advantage, protecting the business from interest rate fluctuations and allowing it to focus on what truly matters: generating predictable [[cash flow]] and growing its operations. Owning productive assets, rather than leasing them, allows a company to build equity on its [[balance sheet]] over time, creating tangible, long-term value for its shareholders. ==== Risks and Considerations ==== No financial tool is perfect, and investors should be aware of the trade-offs. * **Complexity and Time:** The three-party structure means the application process is more complex and takes longer than a standard bank loan. * **Job Creation Goals:** A key requirement of the 504 program is that the business must create or retain a certain number of jobs for the amount of money it borrows. Failing to meet these public policy goals can create issues. * **Fees:** The loan includes fees payable to the SBA and the CDC to cover the costs of backing and administering the program. * **Prepayment Penalties:** The SBA-guaranteed portion of the loan has a declining prepayment penalty for the first 10 years, which can limit a company's flexibility if it wishes to sell the asset or refinance early.