Banks and other lending institutions offer a number of US Small Business Administration (“SBA”) guaranteed loan programs to assist the development of small businesses. While the SBA itself does not make loans, it does guarantee loans made to small businesses by private and other institutions. Specifically, the US SBA 504 loan or Certified Development Company (“CDC”) program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. The SBA 504 program works by distributing the loan among three parties. Typically, a 504 project includes:
•A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
•A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture with a junior lien) covering up to 40 percent of the total cost;
•A contribution from the borrower of at least 10 percent equity.
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.
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