CDCs facilitate 504 loans but are not the direct funding source for the loan proceeds. The CDC works in conjunction with an approved SBA senior lender, which provides at least half of the approved financing. Subordinate financing is arranged by the CDC through the issuance of SBA-guaranteed debentures.

The CDCs add another layer to the approval process for the borrower. Eligibility for the 504 program is determined by the net income and net worth of the borrower, which usually allows more flexibility than the 7(a) program eligibility.

This program is structured as two loans to provide up to 90% financing for qualified real estate and capital asset financing, although recent program changes have limited leverage to 85% for many participants. Construction or acquisition loans are permitted, but borrowers cannot refinance existing debt under this program. The borrower is required to have a minimum 10% equity contribution. Although start-up companies and single-purpose real estate improvements may lead lender to require a 15% equity contribution. The lender provides senior financing for 50% of the transaction and the CDC provides the 40% balance with funds generated from debenture sales.

These debenture funds are obtained from public security markets. Since the debentures provide a guaranteed return to investors, the debenture portion of the 504 loans carry a prepayment penalty if paid out during the first half of the loan term. The 504 program financing is available only in ten- or twenty-year terms.

* Source The SBA Loan Book

The comprehensive handbook for obtaining a Small Business Administration guaranteed loan.