Purpose of the 504 Program

The US Small Business Administration 504 Program is designed to provide financing for the purchase of fixed assets at a fixed rate throughout the entire life of the loan. Operating as a Certified Development Company (CDC), Ocean State Business Development Authority is a nonprofit corporation established to contribute to the economic development of local communities in Rhode Island, Massachusetts, and Connecticut.

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Why it is beneficial

  • Long-term fixed rate financing at below market rates.
  • Customer can obtain up to 90% financing.
  • Borrower receives an expedited closing and low legal fees.

The 504 programs gives the borrower the advantage of having a fixed rate for the entire life of the loan (10/20 years). This is important because it hedges the borrower from any interest rate risk associated with a conventional bank loan.
Interest rate risk is inherent from the interest rate environment that we live in today, and can provide a fair amount of uncertainty for small business owners. This is the case with adjustable rate and ballooning loans. The 504 program gives business owners peace of mind, so that they can plan their future cash flows!

Typical financing structure on a $1,000,000 project:
Type Amount % of Project Collateral
Lender: $500,000 50% First Position
OSBDA/ SBA: $400,000 40% Second Position
Borrower: $100,000* 10%
Minimum equity requirements*:
Standard: 10%*
Business is less than 2 years old: 15%
If real estate is considered “special use”: 15%
If both startup and special use: 12%

* Required of all those who own 20% or more of the operating company / real estate entity.

  • Operate as a for-profit company
  • Do business (or propose to) in the United States
  • Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
  • Ability to repay the loan on time from the operating cash flow of the business

Ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole/ probation. Specific types of businesses not eligible include:

  • Real estate investment firms when the loan is used for investment purposes.
  • Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business.
  • Firms involved in lending activities, such as banks, finance companies, factors, leasing companies, and any other firm whose stock in trade is money.
  • Pyramid sales plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants.
  • Firms involved in illegal activities.
  • Gambling activities, including any business whose principal activity is gambling. The rule does not restrict loans to businesses that obtain less than one-third of their annual gross income from either the sale of official state lottery tickets under a state license, or legal gambling activities licensed and supervised by a state authority.
  • Charitable, religious, or other nonprofit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives.

A 504 loan can be used for:

  • The purchase of land, including existing buildings
  • The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
  • The construction of new facilities or modernizing, renovating or converting existing facilities
  • The purchase of long-term machinery and equipment
  • Consolidating, repaying or refinancing debt (in most cases- please ask you lender)

A 504 loan cannot be used for:

  • Working capital or inventory
  • Speculation or investment in rental real estate