Southland EDC

Helping California Small Businesses Grow

Ash Ballard

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How Does the SBA 504 Loan Benefit Banks?

While the SBA 504 loan is known for helping small businesses secure affordable financing, it also comes with major advantages for participating banks.

When a bank participates in a 504 loan, they typically only finance 50% of the total project cost. This significantly reduces their risk exposure compared to traditional commercial lending. In some cases, a bank may choose to finance a higher percentage—but the typical structure limits their investment to half the deal.

Why Banks Like the 504 Program:

  1. Lower Risk Exposure: Banks maintain a first lien position but often fund just 50% of the project.
  2. SBA + CDC Backing: The remaining project costs are covered by the SBA (via the CDC) and the borrower, making the bank’s position more secure.
  3. Access to More Deals: The 504 structure opens doors to borrowers who may not qualify for conventional financing—expanding the bank’s lending opportunities.

Everyone Wins

  • The Borrower gets long-term, fixed-rate financing with a smaller down payment.
  • The Bank enjoys reduced exposure and a strong collateral position.
  • The SBA fulfills its mission of supporting small business growth and economic development.

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What Is a CDC and Why You Must Work with One for a 504 Loan

If you’re exploring SBA 504 loans, you’ve likely heard the term “CDC.” But what exactly is a CDC—and why is it a requirement, not an option, for this type of financing?

A CDC, or Certified Development Company, is a nonprofit organization chartered by the U.S. Small Business Administration (SBA) to deliver the SBA 504 loan program. These loans help small businesses finance major fixed assets like real estate and equipment at long-term, below-market fixed rates.

What Does a CDC Do?

A CDC is a critical part of the 504 loan structure. Their role includes:

  • Guiding borrowers through the SBA loan application process.
  • Working in partnership with banks to structure 504 loans.
  • Ensuring the project meets SBA eligibility and job creation goals.

Why Work with a CDC?

Because you have to—the SBA requires borrowers to work with a CDC in order to obtain a 504 loan. But beyond the requirement, there are meaningful benefits:

  • Specialized Expertise: CDCs are experts in SBA lending and understand how to move projects efficiently through the approval process.
  • Support from Start to Finish: From application to funding, CDCs stay closely involved.
  • Better Loan Structure: With the CDC financing up to 40% of the project and the bank typically financing 50%, borrowers often only need to contribute 10%—preserving working capital.

Final Thoughts

There’s no way around it: if you want a 504 loan, you need to work with a CDC. Fortunately, their involvement makes the process more manageable and improves your chances of a successful, timely closing.