Is the SBA 504 Loan Program Right For Your Business?
August 10, 2020
August 10, 2020
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
COVID-19 has caused an economic slowdown that has impacted small businesses across the country. And while the Paycheck Protection Program and Economic Injury Disaster Loan (EIDL) program have provided significant financial relief for millions of small business owners, there are also a number of businesses that have either been unable to secure funds through these relief programs or are in need of additional or alternative financing to weather this pandemic-related economic storm.
Luckily, PPP and EIDL loans arenâ€™t the only lending options available to small business owners. The U.S. Small Business Administration has a number of loan programs to help small businesses get the financing they need to continue moving their businesses forwardâ€”and that includes the SBA 504 Loan Program.
The 504 Loan Program is an SBA lending program that provides long-term, fixed-rate loans to small businesses to enable them to acquire fixed assets and cover a short list of soft costs.
But how, exactly, does the 504 Loan Program work? What are the eligibility requirements? And is this type of SBA loan the right fit for your business?
SBA 504 loans are SBA guaranteed loans that enable small business owners to secure the financing they need to acquire the fixed assets they need to expand or modernize their businesses, including commercial real estate or machinery. The 504 Loan Program also has refinancing options that allow business owners to refinance eligible business debt. The maximum loan amount guaranteed by the SBA (which is called the debenture) is $5 million (although certain energy projects may qualify for a $5.5 million debenture). To date, the SBA 504 Loan Program has issued approximately 6,000 business loans for a total of $4.9 billion.
There are a few key differences between 504 loans and other SBA loansâ€”starting with how business owners can use loan proceeds.
504 loans have strict requirements on how loan proceeds can be used, including:
Another major difference between 504 loans and other SBA loans is the way the loans are structured. 504 loans follow a 50/40/10 loan structure that breaks down as follows:
So, for example, letâ€™s say you apply for a 504 loan to build a new brick-and-mortar store for your businessâ€”and the total project costs (land purchase, construction costs, etc.) total $1 million. In that case, the bank would issue $500,000 (50 percent of the total costs), the CDC would issue $400,000 (40 percent of the total costsâ€”and guaranteed by the SBA), and you, as the business owner, would contribute $100,000 as a down payment (10 percent of the total costs).
In order to qualify for a loan through the SBA 504 program, businesses must meet the following eligibility criteria:
Some of the benefits of 504 loans include:
504 loans offer some serious benefits to small business ownersâ€”but theyâ€™re not without their drawbacks. Some of the potential downsides to the 504 Loan Program include:
Ultimately, only you can decide if a loan through the SBA 504 program is right for you. If you want to learn more about the 504 Loan Program and whether itâ€™s the right fit for your business, contact your local SBA office or talk to an SBA-approved lender; they can give you further insights into the loan application process and the steps youâ€™ll need to take to secure financing through the 504 Loan Program.