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SBA 504 Loans- everything you need to know

SBA 504 Loanseffective small business finance for fixed assets creation

SBA CDC/504 Loans are attractive fixed-rate loans to acquire/ construct long-term fixed assets with lower interest rates and convenient repayment terms

SBA 504 loans

SBA CDC/504 Loans are provided to fund the acquisition, construction or upgrade of fixed assets, including real estate and long-term machinery and equipment.

What is an SBA 504 loan program?

Small businesses that need to invest in fixed assets to promote business growth or create jobs may benefit from a U.S. Small Business Administration (SBA) 504 loan. Also known as CDC/504 Loan, these loans are provided through Certified Development Companies (CDCs). CDCs are SBA’s community-based partners who regulate non-profits and promote economic development within their communities. CDCs are basically certified and regulated by the SBA.

The funding for an SBA 504 loan comes from 3 parties as below.

  • A Certified Development Company (CDC)- up to 40% of the financing through a 504 debenture (guaranteed 100% by the SBA);
  • A third-party lender- 50% or more of the financing;
  • The borrower- at least 10% of the financing.

What are the features of SBA 504 loans?

  • SBA 504 loans are provided exclusively through Certified Development Companies (CDCs). So, the lender has to find a CDC first in their area.
  • SBA 504 loans are provided to finance the acquisition, upgrade or construction of long-term fixed assets.
  • The borrowers are not allowed to use the SBA 504 loans for working capital, inventory, refinancing, speculation or investment in rental real estate.
  • The maximum loan amount available under a 504 loan is $5 million. An exception to certain energy projects where the borrower can receive a 504 loan for up to $5.5 million per project.
  • Loan repayments terms: Real estate- 10, 20 or 25 years, Equipment: lower of 10-year term or useful life.
  • Fixed-rate interests are applicable to 504 loans. The rates are pegged to an increment above the 5- and 10-year U.S. Treasury rates, typically around 3% of the amount financed.
  • Fees are included in the financed amount and include an upfront guaranty fee (0.50% of the loan amount), an annual service fee (0.2475% of the outstanding balance) and lender-specific fees.

See how much will be your monthly SBA 7(a) loan payments

Use our SBA 7(a) loan calculator to find out how much money your business may qualify to get.

SBA 504 Loan Calculator

How to become eligible for an SBA 504 loan?

Borrowers need to qualify for the general SBA Loan eligibility requirements, in addition to the criteria specific to the 504 loan program.

SBA 504 loan program specific criteria include:

  • The business must be operating as a for-profit company in the United States or its possessions.
  • The tangible net worth must be less than $15 million.
  • The average net income (after federal income taxes) must be less than $5 million for the two years prior to the application.
  • Qualified management experience
  • The ability to repay the loan

The general SBA loan requirements include

  • The size of the business must be within the SBA size guidelines.
  • There should be a feasible business plan in place.
  • Not be delinquent on any existing debt obligations to the U.S. government
  • A strong personal credit score

Businesses engaged in non-profit, passive, or speculative activities, life insurance companies, religious institutions, private clubs and businesses that primarily engage in lending, lobbying or legal gambling can’t get an SBA 504 loan.

SBA Express loans are the faster version of SBA loans. Read more about SBA Express Loans

SBA Express Loans

What purposes can an SBA 504 loan be used for?

SBA 504 loans are most suited for real estate purchases. 504 loans can also be to purchase fixed assets, as well as to improve or renovate the real estate and fixed assets to be used in the business. SBA specifies the following purposes for which 504 loan proceeds can be used.

  • Acquire land (by purchase or lease) as part of an eligible project;
  • Improve an existing site (e.g., grading, streets, parking lots, landscaping) including up to 5% for community improvements such as curbs and sidewalks;
  • Purchase one or more existing buildings;
  • Convert, expand, or renovate one or more existing buildings;
  • Construct one or more new buildings;
  • Acquire (by purchase or lease) and install fixed assets;
  • Refinance certain outstanding business debts; and/or
  • Finance a Lender’s Other Real Estate Owned (OREO)
  • Purchase or erect long-term machinery or equipment

SBA also specifies certain purposes where an SBA 504 loan cannot be used, such as:

  • Working capital or inventory
  • Consolidating, repaying or refinancing debt
  • Speculation or investment in rental real estate

How to apply for an SBA 504 loan?

The application process for 504 loans is entirely different from other SBA loan programs. Under other SBA loans, a borrower has to work exclusively with SBA and an SBA-approved lender. But in SBA 504 loans, a borrower has to work with a CDC and a third-party lender.

The following are the steps involved in the application process for a 504 loan.

1. Find a Certified Development Company (CDC)

The first step toward applying for an SBA 504 loan is to find a CDC from your locality. CDCs are SBA’s community-based partners who regulate non-profits and promote economic development within their communities. CDCs are basically certified and regulated by the SBA. A list of CDCs is available on the SBA’s portal.

Read more: Top 20 SBA Lenders in the US

2. Make a decision on the purchase/ construction

Once you confirmed the equipment or real assets you want to buy or construct, you need to get formal quotes from contractors or suppliers of machinery/ equipment to determine how much your business needs to borrow. You must cover a minimum of 10% of the total cost with your own cash. Based on the same, you can arrive at the amount of loan support required under the 504 loan program.

3. Submit your loan application

Once you are ready, you need to begin preparing and assembling your 504 loan authorisation package using the SBA-provided 504 Authorization File Library. Then you may submit a formal SBA 504 loan Application through your preferred CDC.

Generally, you can expect to provide the following documents along with your 504 loan application.

  • Business and personal tax returns for the last three years.
  • Business and personal financial statements.
  • A feasible Business plan.
  • Accounts payable and receivable.
  • Contractor estimates (for construction loans).
  • Cost documentation (for equipment loans).

This list isn’t exhaustive, and the CDC and bank you work with may require additional documentation to process your 504 loan application.

4. Await Approval

If your application is approved, SBA 504 loans typically take one to two months to close. Further steps include due diligence which may take up to three weeks additional. During this time, the CDC and lender may request additional documentation to support your application.

Pros and Cons of SBA 504 Loans

SBA 504 Loan Pros
  • Up to 90% funding and low down payment (10% in most cases)
  • Low and the fixed interest rate on 504
  • Repayment terms and long and flexible
  • Includes soft costs such as furniture, fixtures and fees
  • Protection from balloon payments
  • Can include leasehold improvements
  • Up to $5 million for the SBA portion of the loan, no limit on overall project size
  • The 504 Loan Program can be used multiple times
Cons of SBA 504 loans

A major drawback of the program, however, is that a large loan often requires more documentation and a better credit rating than smaller loans. 504 loans are not ideal for borrowers seeking quick loans. It can be used for capital asset creation and cannot be used for working capital.

Alternatives to SBA 504 Loans

SBA CDC/504 Loans are proposed to fund the acquisition, construction or upgrade of fixed assets and the same cannot be used for working capital or inventory requirements. Also, SBA 504 loans are not ideal if you are seeking faster access to funding. The following funding options could be helpful as an alternative to your small business finance.

SBA 7(a) loans: The SBA’s 7(a) loan programs include several popular financing tools that can be used for a variety of needs—including working capital. Loan amounts extend up to $5 million, depending on the program, and have repayment terms up to 25 years for real estate or 10 years for equipment, working capital and inventory loans. Read more about SBA 7(a) loans.

SBA Express Loans:   SBA Express loans are fast in processing and have quicker approval times than 504 loans.  But express loans have lower borrowing maximums (just $500,000). If that amount isn’t enough for you, consider other fast business loans, like a business line of credit.

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