Alright, grab a cup of coffee and take a seat, because we need to have a chat about SBA 504/CDC loans and what happens if you default on these loans. Now, don’t worry, this isn’t a formal meeting, but an opportunity to cut through the jargon and understand this type of loan, provisioned by our good friends at the Small Business Administration, aka the SBA.

The SBA 504/CDC Loan: Money for your Business

Anyone that’s ever entertained the idea of starting a small business knows access to funds is like trying to find a needle in a haystack. Yet, with determination and a tip-off to where the needle is hiding, you can certainly find the funding you need, thanks to something the SBA calls Certified Development Company (CDC) loans.

Here’s the catch. To be eligible, you need to either have a business in a community development zone or be willing to kick-start one. And your credit score? Well, it mustn’t look like a low-golf scorecard. You’ll also need to put down 10% upfront. But look on the bright side, this is a step towards propelling your business to the next level.

Behind the Scenes of SBA CDC Loans

Now, you may perceive the SBA as just some governmental division only concerned with securing funds for small business owners. While that’s a part of their gig, they’re more diverse than that. Apart from helping businesses secure loans to kick-start, prop up or expand existing ventures, they provide counselling services, guidance on how to land government contracts, and even disaster relief.

But to emphasize, the 504 Program is aimed at businesses wanting to put up shop in areas designated for community redevelopment. The loan covers 90% of costs, with the remaining 10% billed as a down payment by the entrepreneurial borrower. Of this 90%, half is covered by an approved financial institution and 40% by the CDC. It’s worth noting that the applicant business doesn’t have to be physically located in the area. As long as they plan to build there and fulfill the job creation criteria established by the community development grant, they are good to go.

The ABCs of SBA 504 Loan Requirements

Here’s the sweet deal about SBA 504 loans. They’re tailored to help businesses with a net worth below $15 million. Your net profits for the preceding two years mustn’t exceed $5 million per year. So basically, it’s clear the program is designed to benefit established, yet not excessively profitable, small businesses.

Newbie in the business realm? Well, you can give it a shot, but you’ll need a robust business plan, exceptional credit, and financial records that substantiate your ability to repay.

Misspending your Lease on Life

Must you put the money to good use? Absolutely. The funds can be used for real estate purchases or new buildings. Or you could renovate an existing structure, landscape, add a parking structure, or add some pizzazz through streetscape enhancements. However, you can’t invest it as working capital or use it to pay off existing debt. Remember, CDC requires job creation. So, look into creating positions that have a long-term economic impact.

The Loan Digits and Collateral for SBA 504 Loans

Contrary to popular comparison, SBA 7a and 504 loans aren’t quite the same. For the 7a loan, you can borrow from $50,000 to a high of $5 million. On the other hand, since the SBA 504 loan is for commercial real estate or equipment, the borrowing range falls between $125,000 and $20 million.

As for the repayment terms, for real estate purchases, you have 20 years to repay the loan. However, you’ve got to be on your guard about market fluctuations, as these significantly impact the calculation of the CDC part of your loan. For equipment purchases, the repayment term is 10 years.

What about collateral? Like any other type of loan, the item you buy or invest in becomes the collateral for the loan. And if you default, well, the lenders have some assurance of recouping their losses.

The ‘D’ Word: Defaults and Your Loan

Sure, defaulting sounds scary, but you aren’t alone. If you default on your 504 loan, the lender will first foreclose on the real estate securing the loan. After this, depending on how much the foreclosure covers, the CDC/SBA could ask you, the guarantor, to repay the unpaid amount. More often than not, you could reach an offer where you agree to pay a certain portion of the debt.

But if you’d pledged personal real estate as collateral, things might get murkier. Foreclosure on your real estate by the CDC/SBA or working out a payment plan, both become an option and at times necessity.

Lawscape and the Lawscape Are Here to Help

Thousands of small businesses have ridden on the coattails of the CDC loans to experience growth within their communities. However, should you default and the SBA/CDC comes knocking, it’s time to arm yourself with an experienced legal counsel.

Get in touch with us at Lawscape for advice customized to cater to your situation. Remember, we’ve navigated millions of dollars in SBA debts and come out on the other side. We’re equipped to take on cases at various stages, from Offer in Compromise and Negotiated Repayment Agreements to disputes with the Treasury Offset Program or Private Collection Agencies.

Leave your SBA debt problems to us and focus on growing your business.