What can a 504 loan pay for, and what can it not?

A 504 loan pays for long-term fixed assets and the costs directly tied to them. SOP 50 10 8.1 lists eligible costs at Sec. C, Ch. 1, Para. C (p. 226).

Eligible costs

• Land and necessary improvements such as grading, streets, parking lots and utilities.
• Buying, building or renovating a building.
• Machinery and equipment with a useful life of at least 10 years.
• Furniture and fixtures, if essential and a minor part of the project.
• Professional fees directly tied to the project, such as title insurance, surveys and zoning matters.
• Short-term bridge debt of 3 years or less that financed these costs.
• Repayment of interim financing, including points, fees and interest.

Ineligible costs

13 CFR § 120.884 excludes working capitalworking capitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition, franchise fees, advertising, organization costs, and automobiles, trucks and airplanes. It also excludes debt refinancing outside the routes in § 120.882(e) and (g).

Contingency reserve

The regulation caps a construction contingency at 10% of construction cost (13 CFR § 120.882(b)). The SOP says 15% (Para. C.8). Budget to the lower figure until your Certified Development Company (CDC) confirms.

Unused contingency above 2% of the debenture reduces the debenture (13 CFR § 120.930(c)).

Ineligible projects

A project cannot relocate a business if that cuts a third or more of its workforce. It also cannot cause a substantial increase in unemployment in any area. The CDC can justify an exception (13 CFR § 120.881).

Projects in foreign countries are also ineligible.