SBA 504 Loan Requirements You Need to Know Before Applying

By Kieran Daly, 21 February, 2023

SBA 504 Loan Requirements You Need to Know Before Applying

In 2022, 9,254 small business owners got the funding they needed through the SBA 504 loan program. Between them, they borrowed $9.2 billion.

Below, find out what an SBA 504 loan is, what SBA 504 loan requirements you need to meet to be approved, and whether it’s the right type of financing for your business.

What Is an SBA 504 loan?

The U.S. Small Business Administration (SBA) provides loans to SMBs at below-market interest rates. It does this in partnership with third-party lenders like banks, savings and loan associations, and credit unions.

Businesses can apply for the following loans:

  • SBA 504 loan: Often called a CDC loan, this is used to fund a real estate project, to purchase business equipment and machinery to enable business growth, or for debt refinancing.

  • SBA 7(a)loan: This is used for working capital purposes; to buy supplies, fixtures, and furniture; or for debt refinancing.

  • Microloan: This is used to finance start-up or early-stage businesses.

The maximum you can borrow with an SBA 504 loan is $5 million. Renewable energy companies, however, can make three concurrent applications for SBA loans for up to $5.5 million per qualifying project.

Repayment terms vary depending on what you need the money for. Loan terms of 10 and 20 years are available. Borrowers can choose from either fixed-rate or variable-rate loans.

Current SBA 504 Loan Requirements

The key criteria you need to meet to qualify for funding concerns the type of business you run, why you need the capital, and how you’ll repay the loan.

First, you need to be an American citizen or hold a current green card.

Second, you need to run a for-profit business that makes less than $5 million per year in average net income (after federal income taxes). Also, your company’s tangible net worth must not exceed $15 million.

Most types of businesses meet current SBA 504 loan requirements except for the following:

  • Political lobbyists

  • Offshore facilities

  • Companies where a third or more of revenue comes from legal gambling

  • Speculative traders (like cryptocurrencies and commodity trading)

  • Speculative real estate investors

  • Insurers (with the exception of independent insurance agencies)

  • Lenders (including banks and credit unions)

  • Clubs closed to pre-approved members

What Can You Spend the Money On?

Borrowers use 504 loans for the following three reasons: property-related projects, business equipment and machinery, and refinancing. Let’s take a closer look at these options.

1. Property-related projects

You could use an SBA 504 loan so that your business can build and own its own premises. If that’s the case, you can use the loan to:  

  • Purchase land on which you construct a new building: You can borrow to buy the land and cover the construction costs.

  • Purchase and improve an existing building: You can use the loan to buy an existing building and then modernize, renovate, and reconfigure it.

In addition, you can use an SBA 504 loan to:

  • Pay for land improvement work: You can set aside part of your project budget for landscaping, adding new facilities (like a parking lot), and improving sidewalks, curbs, and gutters.

  • Buy furniture, fixtures and fittings: You can include the cost of these purchases in your loan application.

  • Meet project costs: You can cover project-related professional costs (like legal, engineering, and architectural), insurance premiums, and general fees (such as filing, title, impact, permit, and utility connection charges).

You may have to set aside up to 10% of the total project cost for contingencies. That’s because, even with the best planning and people, cost and time targets can be missed.

2. Business equipment and machinery

You can use a 504 loan to purchase machinery and equipment and all related transportation, installation, and dismantling costs.

The machinery and equipment you buy must have a minimum useful life of at least 10 years.

3. Refinancing

SBA 504 loans can also be used to refinance existing borrowing facilities. This makes sense if a loan you’re paying off now is charged at a higher interest rate than an SBA 504 loan.

What Can’t SBA Loan Funds Be Used For? 

Current SBA 504 loan requirements do not permit the use of funds for:

  • Working capital purposes

  • Fees relating to the loan application process

  • Vehicles (including airplanes)

  • Equipment you need for the short term or that has a low residual value

  • Construction equipment (except for certain operation-critical heavy-duty equipment)

What SBA Lenders Look For in Projects

The SBA is a non-profit organization charged with achieving government-mandated public policy goals. This means that they can only support 504 loan applications that contribute toward their community development and economic development targets.

For example, if you want an SBA 504 commercial real estate loan for a new building or existing building, your company will need to occupy the majority of the space. As long as you meet this condition, you can rent for the remainder of the space to generate income.

By insisting that more than half of the building is owner-occupied, the SBA ensures that new jobs you create come to the area or that existing ones stay there.

Applying for an SBA 504 Loan

First, approach a certified development company (CDC) for help. CDCs are local delivery partners for the SBA loan program. You can find a list of CDCs on the SBA website.

You’ll need to show them a solid business plan that shows you’ll be able to meet the loan repayments from revenues generated by the project being funded. You’ll also be expected to have a down payment equivalent to 10% of the total project budget.

Job creation is one of the SBA’s prime targets. As a result, you have to demonstrate in your business plan that for every $75,000 you borrow, you’ll be able to create one new full-time equivalent job for the next two years or retain an existing one. If you’re in manufacturing, that figure rises to $120,000.

When the CDC is happy with your application, you then need to find a private lender. They put in 50% of the value of the loan while the CDC/SBA puts in the rest.

Your private lender will want to see tax returns and financial statements (business and personal) going back for three years. They’ll also take into account your business’s current level of indebtedness to see how well you handle company cash flow in general.

If the private lender likes your proposal, they’ll issue a letter of intent telling you what you need to do to get your application in shape before it’s passed to the underwriters for a final decision.

SBA loans are easier to get than traditional bank loans. but you have to be prepared to wait generally between 60 and 90 days. This is not fast funding.

Does Your Credit Score Matter?

Although the CDC won’t be interested in your credit score, your private-sector lender may. Each lender will set their own business loan requirements surrounding credit.

Get Your Small Business Loan Faster With Backd

SBA 504 loans provide assistance to thousands of American businesses every year, but they’re not suitable for companies that need immediate financing. They’re also not right for companies needing a boost to their working capital.

With Backd, you can apply for a working capital advance of $25,000 to $2 million, with the finances you need transferred to your account in just 24 hours after getting in touch. The only business loan requirements we have are that you have:

  • Been in business for one year

  • A minimum of $50,000 in revenue per month

  • A business bank account

  • A business based in the U.S.

Apply for a short-term working capital advance through Backd today.