As a small business owner, you might be at the point where you’re thinking about growing your business. That’s good news, right?
Except you might be wondering how, exactly, you’re going to fund all that growth. Thankfully, there is one loan in particular that has a lot of pluses—the SBA 504 Loan.
We’ll go into exactly what this loan entails, who qualifies and how it can benefit your business. So, let’s get started!
What Is an SBA 504 Loan?
An SBA 504 loan is a long-term, fixed-rate loan offered by Certified Development Companies and backed by the U.S. government.
These small business loans can be used for real estate and equipment purchases, or for modernization and expansion. The ultimate goal is to promote job creation and economic development.
The typical 504 loan works this way:
- The business contributes at least 10% of the desired funds
- A private lender—like a bank—funds approximately 50%, and
- A Certified Development Company covers 40% (backed by the federal government)
The loan amount is capped at $5 million, unless it’s a manufacturing loan or the building meets certain energy efficiency requirements; in that case, business financing can be as much as $5.5 million.
The length of the loan can be 10, 20, or even up to 25 years, depending on the purpose of the loan. For example, all 504 loans for real estate have a term of 20 years.
While the SBA 504 loan program is part of the U.S. Small Business Administration (SBA), the SBA does not make the loan—rather, it guarantees the loan, meaning that if you default, the federal government will repay the loan up to 40% of its value. What that means for you is that getting the loan will be easier. Because the federal government guarantees the loan, lenders are far more likely to lend to you.
What are the Eligibility Requirements for an SBA 504 Loan?
When it comes to the loan application process and loan eligibility, you should find that the requirements are pretty easy to meet. In fact, the 504 program is designed for businesses that cannot easily obtain reasonable terms on financing without the small business administration.
To be eligible for an SBA 504 loan, the SBA and the U.S. Treasury mandate that small businesses meet specific requirements:
- Must be in business for two years or more.
- It must be a private, non-publicly traded, for-profit business, and it must be a sole proprietorship, partnership, LLC, or corporation. Non-profit organizations need not apply.
- The company’s net worth cannot exceed $15 million.
- The business's average net income for the two years prior, after taxes, cannot exceed $5 million.
- Owners must be at least 51% U.S. citizens or registered aliens with green cards.
- The business must do business in the United States or its possessions (i.e., Puerto Rico, Guam, and so on).
- The business itself must be cash flow positive so it can pay off the loan.
- The business must also have sufficient collateral to secure the loan.
- If it is a commercial real estate loan, the borrower’s business occupancy of the property must be at least 51% of the rentable space, and if the loan is for ground-up construction, that number jumps to 60%.
- The real estate purchased cannot be for rental real estate and cannot be for investment properties. It must be used for business purposes.
- Repayment must come from cash flow generated by the project.
- The total project eligible for any 504 loan needs to be between $125,000 and $20 million.
What Can You Use an SBA 504 Loan For?
A 504 loan can go toward assets you need to grow your business.
These assets include:
- New construction
- Existing buildings (that you want to expand or modernize)
- Machinery and equipment with a useful life of at least 10 years
Loan proceeds cannot be used for:
- Investment property
- Working capital
- Inventory
- Start-up costs
- Marketing/advertising
The Benefits of an SBA 504 Loan
This loan is made by specific private lenders to small businesses. It is unique for a few reasons:
- Easier to get: Since the loan is at least partially guaranteed by the U.S. government, these loans tend to be easier to get because the risk to the lender is less.
- Low down payment: Typically, the max you will have to put down is 20% of the entire loan amount. Most businesses put down 10%.
- Low interest: Another great thing about these loans is that they should have lower interest rates than the typical loan.
- Fixed rates: These loans offer fixed rate financing, meaning your payment amount is set for the entire duration of your loan. That means you can budget well in advance.
- Give you a long time to pay them off: You can get as much as 25 years to pay off this loan, which means you can spread out your expenses over a long period of time. That should make it easier to make investments and grow your business.
- Refinancing: Refinancing with a 504 may be a good way to go too. If you have several loans on a property, for example, you can consolidate them with a 504 loan of up to 90% of the property’s value.
Can Businesses Younger than Two Years Old Get a Loan?
As indicated, flexibility is a hallmark of this loan program and as such, there are times when startups or small businesses otherwise in business for less than two years are eligible for a loan. They are when:
- The startup's owners and managers have specific experience related to the project associated with the loan (e.g., they used to manage real estate and the company is looking to buy an apartment complex).
- There is a solid business plan.
- Cash flow and working capital are solid.
In that case, owners will be expected to pony up a 15% equity contribution, as opposed to 10%.
Finding an SBA 504 Lender
Since the federal SBA is sticking up for you and willing to guarantee 40% of your loan, the risk to a lender is less, and therefore, those lenders are willing to lend more easily, even if you don’t have a perfect credit score for example.
What a potential borrower needs to do, therefore, is find a lender that specializes in SBA loans, known as a Certified Development Company (CDC).
A CDC is an SBA-affiliated nonprofit lender that offers affordable financing to small businesses. They’ll process your application, coordinate the financing you’ll need and send your package to the SBA.
Across the U.S., there are approximately 260 CDCs. You can find a CDC near you here.
Some documents you’ll need include:
- Tax returns for the last three years (business and personal)
- Financial statements (business and personal)
- Your business plan
- Accounts payable and receivable
- Estimates from your contractor (for construction loans)
- Cost of any equipment you want to buy
SBA 504 Loans vs. SBA 7(a) Loans
As indicated, the SBA guarantees all sorts of loans, the CDC/504 loan program being just one. Another similar loan is called the 7(a) loan. Here’s how these two loans compare:
Similarities
- Both 7(a) loans and 504 loans are guaranteed by the federal government.
- The maximum loan amount for both is $5 million.
Differences
- 504 loans are limited to real estate, machinery, or for modernization and expansion, whereas 7(a) loans can also be used for working capital and inventory.
- 504s must be applied for via a CDC. 7(a) loans go through private lenders.
So, Is an SBA 504 Loan Right for Your Small Business?
There is a lot to be said for 504 loans. For starters, the down payment is usually low at 10%. Beyond that, the loan’s competitive, fixed rates remain that way for the entire term of the loan, which makes them additionally attractive.
And finally, the fact that long-term financing can go up to 25 years is no small thing either; debt servicing is much easier when spread out.
There really are very few downsides to speak of with SBA 504 loans, so we won’t speak of any. If you need money for real estate or business equipment, the 504 loan is likely a good way to go.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
Cheers,
John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
Cheers,
John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
Cheers,
John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
Cheers,
John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
Cheers,
John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
Cheers,
John Doe
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!
Cheers,
John Doe