If you're a commercial real estate investor or small business owner in need of financing, you may benefit from a specialized loan program called the SBA 504 loan. These long-term loans are designed for helping new and growing businesses acquire financing to expand, make capital improvements, or even purchase new commercial real estate.
Learn what an SBA 504 loan is, how it works, who is eligible for the 504 loan program, and how the 504 loan compares to other SBA loan programs.
What is an SBA 504 loan?
An SBA 504 loan is a long-term loan issued through a nonprofit corporation called a Certified Development Company (CDC) and third-party lender, which is overseen, authorized, and regulated by the Small Business Administration (SBA).
How does an SBA 504 loan work?
The structuring of an SBA 504 loan will vary on a loan-by-loan basis; however, SBA 504 loans designate funding through a specialized loan structure:
- Up to 50% as a bank loan conveyed as a conventional first mortgage.
- Up to 40% as a CDC loan, which is backed by the SBA and conveyed as a second mortgage.
- 10% to 20% down payment by the borrower or business owner.
Funding for an SBA 504 loan starts at $125,000 and is capped at $5 million, although certain businesses, such as energy projects, can receive up to $5.5 million or more. Loan proceeds can be used for the following purposes:
- To fund fixed assets:
- Existing facility or piece of real estate.
- Leasehold improvements.
- Ground-up construction.
- Expansion or renovation costs.
- For working capital:
- Seasonal financing.
- Export loans.
- Revolving credit.
- Refinancing business debt.
SBA 504 loans are usually fixed-rate loans that can span as long as 25 years, depending on what the funds are being used for.
Who is eligible for an SBA 504 loan?
The goal of the SBA 504 loan program is to provide small businesses with long-term financing (10-, 20-, or 25-year loan term) at competitive rates that promote economic growth and job creation. This means only for-profit businesses that operate in the United States are eligible for a 504 loan.
Applicants must have invested interest or equity in the company and be able to prove how the loan will stimulate economic activity or help retain or create jobs. Additionally, the applicant's tangible net worth cannot exceed $15 million, and the business's average net profit after taxes for the past two years cannot exceed $5 million.
CDCs and the SBA have defined eligibility qualifications, which are described above, but any participating lender has the right to designate their own eligibility requirements that may go above and beyond the SBA 504 program.
It's important to note that any principal owners, which are those with a 20% or more equitable share in the business, are required to provide a personal guarantee as a part of the 504 program.
How does the SBA 504 loan differ from the SBA 7(a) loan?
The 504 loan is not the only loan program offered by the SBA. The SBA 7(a) loan is another loan program offered through the Small Business Administration, although it is suited for different business needs than the SBA 504 program. At first glance, it may be difficult to understand which program is right for you, so let's take a look at how they differ.