SBA 504 Loans Explained: Who’s Eligible, and How Do You Apply?
Think of SBA 504 loans as business finance but powered by a social purpose.
Run by the U.S. Small Business Administration (SBA), you only get the capital you need if your project helps stimulate local economic development. The SBA must consider every loan application they receive not only on its commercial merits but also on public policy goals politicians set for them.
SBA 504 loans (sometimes known as SBA 504 debentures) are very popular. Nearly 10,000 small businesses borrowed $9.2 billion through the program in 2022.
In this article, we review what a 504 loan is, how you qualify for one, and what the application process is like.
What Is an SBA 504 Loan?
An SBA 504 loan is a type of business finance provided by the Small Business Administration in partnership with a private-sector financial institution, like a bank or credit union.
Borrowers use the SBA 504 loan program to fund:
Commercial real estate projects: You can purchase an existing building to renovate or land on which you want to construct a new building. Part of the loan may be used for landscaping, the installation of new facilities like a car park, and soft costs like architectural fees.
Equipment and machinery purchases: You can borrow money to buy machinery and equipment to grow your business, including any costs related to its transport, installation, and dismantling.
Refinancing: Some borrowers pay off existing loans and choose to refinance using an SBA 504 facility. That’s because interest rates are often more competitive than you’d get directly from a bank or credit union. SBA 504 interest rates are pegged to the five- and 10-year U.S. Treasury note rates.
Special purpose projects: There are 27 special real projects that you can use SBA 504 loans to fund — ranging from amusement parks to hospitals and golf courses to quarries.
What Are the Current SBA 504 Loan Eligibility Requirements?
Under Current SBA loan requirements, borrowers need to meet the following criteria:
Purpose: You may only use a 504 loan for the reasons listed above.
Citizenship: You must be a U.S. citizen or hold a current green card to apply.
Company size: Only small business owners whose companies have an average net income of $5 million a year and whose tangible net worth is less than $15 million are eligible.
For-profit businesses only: Non-profit organizations may not apply, according to the SBA.
Line of business: Types of businesses engaged in activities like political lobbying, speculative traders, and money lending are not eligible for SBA 504 loans.
Owner-occupied property: If you want to fund a real estate project, your business must occupy 51% of the available space in renovated existing buildings and 61% in new builds to be considered for SBA approval.
Equipment longevity: If you’re borrowing to buy business equipment and machinery, its minimum useful life must be at least 10 years.
Job creation/preservation: You need to show that you’ll be able to create or retain a full-time equivalent job for two years after receiving the loan for every $75,000 borrowed (or $120,000 for manufacturing businesses).
How Do You Apply for an SBA 504 Loan?
You don’t apply through SBA.gov for a 504 loan. Instead, you need to approach a certified development company (CDC) — sometimes known as an “SBA lender” — to process and package your application.
There are three main steps to getting an SBA 504 loan: preparing your application, submitting your application, and receiving a decision.
You’ll first need to present your business plan to the CDC you choose. Your financial forecasts must show that cash flows and revenues from the project or purchases you need the loan for will cover the loan repayments. They’ll also request copies of personal and business financial documents like your tax return.
The next stage is pre-qualification. This means that the CDC tests the assumptions in your business plan and financial forecasts to see if they stack up. They’ll help you adjust your plan if they don’t.
After that, you need to tell your CDC which building, plot of land, or equipment you want to buy (unless you’re refinancing). They’ll also want to know all other costs your project will incur, so you’ll need to reach out at this point to contractors and any other suppliers for quotes.
When you do have a total project cost, you’ll need to prove that you have a 10% down payment (or more in some circumstances). This is just like the deposit a lender asks you to provide when you apply for a mortgage.
You then have to apply for the loan through a private lender, like a bank or credit union.
Your lender may ask you for more documentation, particularly if you’re borrowing a lot of money or your project is complex.
If your application is approved, the bank contributes 50% of the money, the Small Business Administration contributes 40%, and you contribute 10% with your deposit.
On completion, you’ll receive post-closing requirements. They instruct you to share details with the private lender on various business matters including insurance, tax, and shareholder structure changes.
How Much Can You Borrow?
The minimum amount you can borrow with an SBA 504 loan depends on the CDC and the private lender you select. The maximum loan amount is $5 million although some renewable energy sector projects can apply for up to $5.5 million in funding.
SBA 504 loans’ maximum repayment term is 25 years. Early prepayment penalties apply for the first 10 years of the loan.
Your SBA 504 loan will have a fixed interest rate meaning that what you pay back every month will stay the same over the entire loan term.
SBA 504 FAQs
SBA 504 loans are a popular choice for businesses wanting to grow. Below, we answer some of the most frequently asked questions by potential borrowers.
What Is the Difference Between an SBA 504 and 7(a)?
The main differences between an SBA 504 loan and an SBA 7(a) loan are that you can take out an SBA 7(a) loan:
For working capital purposes
On a fixed-rate or variable-rate basis
You also don’t need to meet the job creation requirement for a 7(a) loan.
When it comes to interest rates, the SBA 504 loan has a fixed rate (called the effective rate) that includes an interest rate pegged to the U.S. Treasury market rate and fees. For the SBA 7(a) loans, you can have either a fixed or variable rate that is based on the prime rate plus an additional percentage.
Are SBA 504 Loans Hard to Get?
SBA 504 loans are not hard to get. You may actually find it easier to get approval on a 504 loan than a standard bank or credit union loan. That’s because the CDC shares the financial risk.
Some borrowers may however get frustrated with the lead time in getting approval which can, in a few cases, take up to six months following application.
What Is the Maximum Amount of Money That an SBA 504 Loan Can Provide?
Borrowers can apply for a small business loan of up to $5 million with an SBA 504 (and $5.5 million on certain renewable energy projects).
Why Are SBA 504 Loans So Popular?
SBA 504 loans are popular because of their competitive interest rates. And, because the SBA is involved in the process, you may have a better chance of getting your loan approved than going directly to a bank or credit union.
SBA 504 Loan Alternatives From Backd
An SBA 504 loan is great for financing real estate projects and big business equipment purchases. But what if you need funding for another reason?
Backd offers two SBA 504 loan alternatives: business lines of credit and working capital advances.
Get between $10,000 and $750,000 in finance with a business line of credit. With a working capital advance, you can get between $10,000 and $2 million of funding.
Apply in just three minutes today to get the financing you need as soon as tomorrow.