What Is an SBA 504 Loan, and How Much Can You Get?

As a small business owner, you might be at the point where you’re thinking about growing your business. That’s good news, right?

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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.

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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. 

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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.

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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)

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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. 

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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. 

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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. 

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These assets include:

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• 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).

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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.

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Across the U.S., there are approximately 260 CDCs. You can find a CDC near you here.

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Some documents you’ll need include:

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• 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. 

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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.