Real 504/CDC loans are available to most any business.
The best keep secret in small business finance is a Real 504 / CDC loan. This type of loan is specifically designed to help small businesses buy real estate. A Real 504 / CDC loan provides long-term financing for the purchase of real-estate at very low interest rates. The key is that the real estate being purchased, or building being constructed, must be owner-occupied.
In other words, the loan is not for buying rental or investment property. The business taking the loan must occupy at least 51% of the square footage.
What type of business uses these loans? A well known firm that helps businesses secure these loans has recently worked with a gun shooting range, a provider of window shutters, a hotel, and a medical office to get 504 / CDC loans. These loans are for retailers, manufacturers, and office based businesses…basically everyone!
Why is the Real 504 / CDC Loan a great deal?
Low Interest Rates & Long Terms
The Real 504 / CDC loan is in fact not a single loan, it’s two loans. One loan which is held by a bank or financial institution, and a second loan which is held by a CDC (a non-profit financial institution). Both loans have the real estate as collateral, however, the loan made by the bank or financial institution gets paid off first from the sale of the real estate. In short, the chances of the bank not being able to eventually get back its money is very, very low. As a result, they are willing to offer very attractive interest rates and terms.
The CDC loan is guaranteed against default by the Small Business Administration (SBA). They too can offer very attractive terms.
For details on typical terms, please read, this article by Fit Small Business.
How is the Real 504 / CDC loan different than a 7A loan?
An SBA 7a Loan can be used for many purposes, including the purchase of real estate, while the Real 504 / CDC loan is exclusive to real estate projects and purchase. Putting the technical differences between these “loans” aside, Real 504 / CDC loans tend to have much longer maturity terms, be for larger amounts of money, and have fixed versus variable interest rates.
- Ten years is the maximum maturity of 7a loans. The CDC portion of a Real 504 /CDC loan can be from 10 to 20 years.
- 75% of 7a Loans are for amounts under $350K. Only 12% of 504 / CDC loans are amounts under $350K.
- Banks tend to avoid providing fixed rate 7A loans. Instead, the rates tend to move up and down based on what is known as the prime rate. Real 504 / CDC loans tend to have fixed interest rates until maturity, or only one date in which interest rates can be changed.
Why haven’t you heard of these loans if they are so great?
This article was originally written on December 18, 2014 and updated on November 2, 2016.