Certified Development Companies, or CDCs, are not-for-profit companies established to encourage economic growth in its local area. There are some hundreds of Certified Development Companies in the United States. Certified Development Companies, among other things, supplement loans under the SBA 504 Loan Program.
Certified Development Companies and their Part in 504 Loans
Certified Development Companies are set up under the 504 Code and play a part in SBA 504 Loan Programs. SBA 504 Loans are a type of SBA small business loan made to help small businesses expand, grow and hopefully create jobs and encourage other economic growth in the area.
SBA 504 Loans have a very specific structure. The applicant should have a project in mind, but not just any project. SBA 504 Loans have to be used in 1 of a number of approved ways. Once it’s established that the borrower’s project falls into one of the approved categories for the proceeds of its loan, the structure of the financing is decided. There are usually 3 parties involved.
The SBA Bank
First is the SBA bank. This bank is specifically set up to offer loans that are guaranteed by the Small Business Administration. It’s important to keep in mind that these SBA banks are private banks and completely separate from the SBA itself. They do their own underwriting and make their own credit decisions, and as long as the loan meets certain criteria, the SBA guarantees repayment of the loan on behalf of the borrower. These programs are meant to encourage banks to lend money in specific ways. With SBA 504 Loans, the bank typically funds up to 50% of the cost of the project.
Certified Development Companies
As described above, these are third party non-profit corporations established to encourage economic growth and development. Once the project is approved and the loan application has been underwritten, Certified Development Companies pitch in for part of the deal. They typically fund up to 40% of the cost of the project, and their repayment is worked in with the terms set forth by the bank.
The borrower is asked to finance anywhere from 10% to 20% of the cost of the project. How much of the cost they have to cover is at the bank’s discretion. Certified Development Companies are important for the execution of these loans which are responsible for a lot of local economic growth in the United States.