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Wednesday, October 2, 2013

Small Business Administration 504/CDC Loan Guaranty Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration (SBA) administers programs to support small businesses, including several loan guaranty programs designed to encourage lenders to provide loans to small businesses “that might not otherwise obtain financing on reasonable terms and conditions.” The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is administered through non-profit Certified Development Companies (CDC). It provides long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of the total project costs, a third-party lender must provide at least 50% of the financing, the CDC provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of the financing. Its name is derived from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), which provides the most recent authorization in the act concerning the sale of 504/CDC debentures. In FY2012, the SBA approved 9,471 504/CDC loans amounting to about $6.7 billion.

Congressional interest in the SBA’s 504/CDC program has increased in recent years because of concern that small businesses might be prevented from accessing sufficient capital to assist in the economic recovery. During the 111
th Congress, P.L. 111-240, the Small Business Jobs Act of 2010, increased the 504/CDC program’s loan guaranty limits from $1.5 million to $5 million for “regular” borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. It also temporarily expanded, for two years, the types of projects eligible for 504/CDC program refinancing of existing debt, created an alternative 504/CDC size standard to increase the number of businesses eligible for assistance, and provided $510 million to extend temporary fee subsidies for the 504/CDC and 7(a) loan guaranty programs and a temporary increase in the 7(a) program’s maximum loan guaranty percentage to 90%. The temporary fee subsidies and 90% loan guaranty percentage ended on January 3, 2011, and the temporary expansion of the projects eligible for 504/CDC program refinancing of existing debt expired on September 27, 2012.

This report opens with a discussion of the rationale provided for the 504/CDC program, the program’s borrower and lender eligibility standards, program requirements, and program statistics, including loan volume, loss rates, use of proceeds, borrower satisfaction, and borrower demographics.

It then examines congressional action taken during the 111
th Congress to help small businesses gain greater access to capital, including the enactment of P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), and P.L. 111-240, the Small Business Jobs Act of 2010. It also discusses congressional efforts during the 113th Congress to extend the temporary expansion of the projects eligible for 504/CDC program refinancing of existing debt, which expired on September 27, 2012. For example, H.R. 1240, the Commercial Real Estate and Economic Development Act of 2013 (CREED Act of 2013) would extend the temporary expansion of the projects eligible for 504/CDC program refinancing of existing debt for five years following the bill’s enactment. Its companion bill in the Senate (S. 289), as amended in committee, would extend the temporary expansion of the projects eligible for 504/CDC program refinancing of existing debt during any fiscal year in which the 504/CDC program is operating at zero subsidy. Issues raised concerning the SBA’s administration of the program, including the oversight of 504/CDC lenders, are also discussed.

Date of Report: September 17, 2013
Number of Pages: 34
Order Number: R41184
Price: $29.95

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