A Certified Development Company (CDC) is a nonprofit corporation certified and regulated by the Small Business Administration (SBA) to process 504 Loans. These loans are part of the SBA’s 504 Loan Program aimed at promoting economic development by providing financing for major fixed assets such as real estate and equipment.
Historical Context
The concept of CDCs was created by the SBA to bridge the gap in financing that many small businesses face. The 504 Loan Program was established by Congress with the intent to help small businesses grow and create jobs by providing long-term, fixed-rate financing for major fixed assets.
Types/Categories of CDCs
- General CDCs: Handle a variety of loan applications from different sectors.
- Special Purpose CDCs: Focus on specific industries or regions.
- Multi-State CDCs: Operate across state lines and are authorized to process loans in multiple states.
Key Events
- 1953: The SBA was created under the Small Business Act.
- 1980: The 504 Loan Program was established.
- 2009: The American Recovery and Reinvestment Act temporarily increased loan caps to support small businesses during the financial crisis.
Detailed Explanations
A Certified Development Company works in tandem with private sector lenders to provide financing to small businesses. A typical 504 loan structure includes:
- 50% of the project cost from a private-sector lender.
- 40% from the CDC, backed by a 100% SBA-guaranteed debenture.
- 10% equity from the borrower.
Financial Model
Here’s a simplified financial model:
Project Cost: $1,000,000
- Private Lender (50%): $500,000
- CDC/SBA (40%): $400,000
- Borrower Equity (10%): $100,000
Importance and Applicability
CDCs play a crucial role in:
- Economic Development: By financing projects that create jobs and stimulate economic growth.
- Supporting Small Businesses: Providing access to long-term, fixed-rate financing.
Examples
- A small manufacturing company wants to purchase a new facility costing $1,500,000. A CDC can facilitate a 504 loan where the company puts down $150,000 (10%), the CDC covers $600,000 (40%), and a private lender finances $750,000 (50%).
- A tech startup needs to buy sophisticated equipment worth $500,000. The CDC can help arrange financing where the startup invests $50,000, the CDC loans $200,000, and a private lender contributes $250,000.
Considerations
- Eligibility: To qualify, businesses must be for-profit, fall within SBA size standards, and demonstrate a need for the loan.
- Job Creation: Projects funded must meet job creation or public policy goals.
- Collateral: Loans are typically secured by the assets financed.
Related Terms
- 504 Loan: A loan program by the SBA that provides businesses with long-term, fixed-rate financing for major assets.
- SBA: Small Business Administration, a U.S. government agency that supports small businesses.
- Debenture: A type of debt instrument not secured by physical assets or collateral.
Comparisons
- 504 Loan vs 7(a) Loan: 504 loans are specifically for fixed assets and real estate, whereas 7(a) loans are more versatile, allowing for working capital, equipment, and other purposes.
Interesting Facts
- The SBA does not directly lend money but guarantees the loan parts provided by CDCs.
- The 504 loan program has contributed billions of dollars in fixed-asset financing and has created millions of jobs.
Famous Quotes
- “The SBA’s role in helping small businesses succeed is more important than ever.” - Karen G. Mills, Former SBA Administrator
Proverbs and Clichés
- “Small businesses are the backbone of the economy.” - This highlights the importance of small enterprises and the crucial role CDCs play.
Expressions
- “Funding the future”: Describes how CDCs help businesses grow and develop.
Jargon and Slang
- “504 Deal”: Informal term for a project financed through the SBA 504 loan program.
- “CDC Debenture”: Refers to the long-term bond issued by the CDC.
FAQs
Q: What is a 504 loan?
A: A 504 loan provides financing for major fixed assets like real estate and equipment.
Q: Who can apply for a 504 loan?
A: For-profit businesses that meet SBA size standards and demonstrate the need for the loan.
Q: How does a CDC make money if it’s a nonprofit?
A: CDCs typically charge fees for their services, which are included in the loan structure and cover their operational costs.
Q: Can a business apply for multiple 504 loans?
A: Yes, as long as they meet eligibility requirements and the loans do not exceed SBA program limits.
References
- Small Business Administration (SBA) Official Website
- U.S. Government Accountability Office Reports on SBA Programs
- Academic Journals on Economic Development and Finance
Summary
Certified Development Companies (CDCs) are vital to economic development and the growth of small businesses. By offering structured, long-term financing solutions through the SBA 504 Loan Program, CDCs help businesses invest in their future and, by extension, stimulate job creation and economic prosperity. With a thorough understanding of their operations, eligibility requirements, and the significance of their role, stakeholders can better appreciate the pivotal contribution of CDCs to the business ecosystem.
