SEDA-COG Local Development Delivers Below Market Rates and Timely Commitments Under the SBA 504 Loan Program
by Tom Rall


With twenty years of experience financing new and expanding businesses, SEDACOG Local Development Corporation has learned a very basic lesson: “deliver the service and be timely for your clients.” This is not the typical perception of a government finance program. SEDA-COG Local Development Corporation has grown based on our difference in the marketplace and the way we deliver government lending.  

SEDA-COG Local Development Corporation is developing the largest 504 portfolio in Pennsylvania and is in the top 100 CDC’s in the nation delivering the 504 loan program. Our LDC began lending in 1982, and has impacted over 133 companies in our market. Our active portfolio is over $55 million dollars in both commitments and funded projects.  

What is the 504 and how does it work?  

SEDA-COG Local Development Corporation partners with local realtors, bankers and other economic development agencies to qualify the eligibility and identify comprehensive funding approaches for projects. We collect all of the paperwork required to make an application to the SBA from the potential borrower. We act as the bank’s and client’s advocate to the SBA. SEDA-COG works like a participant bank in the credit as we make the local recommendation for approval and service the loan for either a 20 or 10 year term – whichever bond is appropriate. The Small Business Administration guarantees the bond pool and Colson Services collects payments and distributes payments semiannually to the investors in the pool.  

The 504 loan program is funded by the private sector. This has resulted in a stable chain of investment for over 20 years. This arrangement has provided small business owners with significantly less cost. The cost to get to the bond markets are spread over hundreds of projects across the United States, which lowers the entry cost to the local project. The 20-year fixed rate, which was funded in August was 6.85%. This included all the closing and servicing cost associated to the Bond.  

Who is eligible to borrow?  

Small businesses are eligible. Retailers, wholesalers, manufacturers, commercial, industrial, and agricultural businesses are eligible. You must be for profit. The aggregate net worth of the company must be less than $7.5 million and average net income over the last two years less than $2.5 million, to be considered small by program guidelines. If you exceed these guidelines, we can qualify most projects in manufacturing by number of employees – typically manufacturers with 500 or less employees and wholesalers with 100 or less employees are considered as small businesses.  

When does it make economic sense to pursue 504 Loan Funds?  

SBA 504 projects are often among the larger projects involving SEDA-COG; for example, some larger in terms of public financing. Projects are benefited when total eligible cost exceeds $300,000. Smaller projects can be considered. Bonds may be issued as low as $50,000. SEDA-COG LDC staff will contact the potential project borrower and partners to discuss the fees as they apply to smaller 504 loan projects.  

What may be financed?  

The 504 Loan program can only finance fixed assets, so we develop projects that are tied to Real Estate, Improvement to Real Estate and Machinery and Equipment. Soft cost associated with the purchase of the property and professional fees are also included. A few of the eligible soft costs to be financed under the bond are attorney, survey, appraisal, engineering, environmental, title insurance, rigging, erection services, interest on the SBA portion, and closing fees associated with interim finance.  

What does it cost to get a 504 Loan?  

The most significant costs are the CDC fee, underwriter’s fee, and SBA fee; all combined are slightly over 3.0%. The closing fees and servicing fees included in the above are absorbed into the bond. The borrower does not have to come up with the cost associated to the fees at settlement. The fees are amortized over the life of the bond. The August interest rate above includes the impact of the fees.  

What is the maximum I can borrow under the 504 Loan?   Financing of up to $1,000,000 is available, or up to 40% of the project’s total eligible cost. In some cases, financing of up to $1.3 million is possible, based on public policy incentives in the program. Manufacturers, minority owned businesses, women owned businesses, rural development, and expansion of export capacities all meet public policy initiatives in the program.  

What kind of project structure is typical?  

SEDA-COG has found opportunities to invest in projects that include commercial condominium structures, long term land lease agreements, and multiple tenant structures. Real estate holding companies with direct lease to an operating concern is a normal transaction under the 504 loan program. The banks involved in the project are the majority stakeholder, at 50% invested in eligible cost. SBA 504 may invest up to 40% of the eligible cost, and is typically behind the bank in priority of lien. The design is simple. The purpose is to leverage more private sector finance in the local economies we serve. The reduced risk for the bank in the project is a incentive for banks to stay involved in niche markets: hotels, franchise restaurants, specialized equipment in industries like prepress, agricultural enterprises and food processing.  

What is the typical Equity Requirement in the project?  

At a minimum, 10% of the eligible project cost. Additional equity will be required for business start-ups, businesses formed for less than two years, and special purpose buildings and equipment.  

The 504 program also offers many advantages to banks and our clients. The long term fixed rate provides cash management on up to 40% of project, the fees absorbed by the bond saves your client cash outlays at closing, and the minimum equity requirement preserves cash for the company, generally at a critical cycle of the business. Often times, companies have found themselves needing 30% down or more, plus cash for renovations and soft costs, and still have enough working capital left to expand the operation.  

For more information on SEDA-COG, visit the website at www.seda-cog.org.

Tom Rall, Senior Loan Officer joined SEDA-COG in March 1997 after 15 years in banking. Mr. Rall was an Assistant Vice President at First National Trust Bank in Sunbury, Penn. He had been involved in all areas of commercial lending for the previous 12 years.

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