How does a 504 loan work?

Every SBA 504 loan is a partnership between a Certified Development Company (CDC), the Small Business Administration (SBA), and a lender.  CDC's are economic development organizations that have been certified by the SBA to make loans under the Certified Development Company Economic Development Loan Program (otherwise know as the SBA 504 Loan Program).

The CDC works with the small business borrower to process, approve, close, and service the SBA 504 loan. Funding is provided by the CDC through the issuance of 10-year or 20-year debenture bond that is sold to investors on Wall Street in a monthly offering. This gives entrepreneurs access to capital at low, fixed interest rates - usually only available to large corporations. Debenture bonds are also attractive to investors since they are backed by the SBA and fully guaranteed by the U.S. Treasury.

Working with a lender, the CDC provides up to 40% of the financing for a commercial real estate purchase or new construction with an SBA 504 loan.  A lender must partner with the CDC and typically provides up to 50% of the financing, while the entrepreneur's contribution can be as low as 10%.