======SBA 504 Loan Program======
The SBA 504 Loan Program (also known as the 'CDC/504 Loan Program') is a financial lifeline offered by the U.S. [[Small Business Administration]] (SBA) designed to help small businesses flourish. It provides long-term, fixed-rate financing for acquiring major [[fixed assets]], such as real estate or heavy equipment, that promote business growth and job creation. Unlike a typical bank loan, the 504 program is a partnership. A private lender covers a large portion of the cost, the SBA backs another chunk through a specialized non-profit partner, and the business owner contributes a smaller down payment. This unique structure makes financing more accessible and affordable, allowing small companies to make the significant capital investments necessary to scale up. For a value investor scrutinizing a small company, understanding this program is key, as a 504 loan on the [[balance sheet]] can be a powerful indicator of a management team's long-term strategy for growth and asset acquisition.
===== How Does It Work? The 50-40-10 Magic =====
The beauty of the 504 loan lies in its collaborative structure, which spreads the risk and makes lenders more willing to say "yes." Think of it as a three-layer cake:
  * **50% from a Private Lender:** A conventional bank or credit union finances half of the project cost. They get the senior, or first, [[lien]] on the asset, meaning they get paid back first if the loan defaults. This lower risk often translates to better terms.
  * **40% from a CDC:** A [[Certified Development Company]] (CDC)—a non-profit organization focused on economic development—provides up to 40% of the financing. This portion is 100% guaranteed by the SBA, making it very secure. The CDC takes the second lien position.
  * **10% from the Borrower:** The small business owner makes a [[down payment]] of at least 10% of the project cost. This [[equity]] injection demonstrates commitment and is often significantly less than what would be required for a conventional commercial loan.
This structure typically results in a blended interest rate that is highly competitive, with the CDC/SBA portion offering a long-term fixed rate for up to 25 years. This stability is invaluable for financial planning.
===== What Can You Use a 504 Loan For? =====
The SBA is quite specific about how these funds can be used. The program is designed for long-term investments that build a business's foundation, not for day-to-day expenses.
==== Approved Uses ====
  * Purchasing land and existing buildings.
  * Constructing new facilities or renovating, converting, or expanding existing ones.
  * Acquiring heavy machinery and equipment with a long service life (typically 10+ years).
==== Prohibited Uses ====
  * Funding [[working capital]] or purchasing inventory.
  * Consolidating or refinancing existing debt (with some exceptions).
  * Investing in or purchasing rental properties.
===== The Investor's Perspective: Why Care About a 504 Loan? =====
As an investor, you're looking for companies with smart leadership and a clear path to creating value. A 504 loan on a company's books can be a significant clue.
=== The Good Signs ===
  * **Prudent [[Capital Allocation]]:** The presence of a 504 loan suggests management is using low-cost, long-term [[leverage]] to acquire productive assets that can generate future cash flow. This is a hallmark of a disciplined growth strategy.
  * **Third-Party Validation:** Before a 504 loan is approved, the business plan and project are scrutinized by both a private bank and a CDC. This provides an extra layer of due diligence that suggests the expansion plan is sound.
  * **Building a [[Moat]]:** Owning property instead of leasing can lock in a major operating cost, insulating the business from rising rents and building valuable equity over time. This strengthens the company's competitive position.
=== Potential Red Flags ===
  * **Over-Leveraging:** While often "good debt," it is still debt. An investor should always check the company's overall [[debt-to-equity ratio]] to ensure it hasn't bitten off more than it can chew.
  * **Asset Mismatch:** Is the new facility or expensive machine truly essential for the business's core strategy? An investment in an asset that doesn't generate a sufficient [[return on investment]] can destroy value, no matter how favorable the financing.
  * **Inability to Secure Conventional Financing:** While the 504 program is an excellent tool, a heavy reliance on it might indicate the business is not yet strong enough to secure financing on its own merits from the private market.
===== Key Takeaway =====
The SBA 504 Loan Program is a powerful government-backed tool that helps healthy small businesses finance major assets to fuel their growth. For an investor, it's more than just a line item of [[long-term debt]]. It can signal a management team that is thinking about the future, strategically acquiring assets, and building long-term value. However, like any form of debt, it requires careful analysis. The savvy investor will see it as a prompt to dig deeper: Is this leverage being used wisely to widen the company's moat, or is it a sign of a risky, unfocused expansion?