Is the SBA 504 Loan Program Right For Your Business?

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 aren’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 forward—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?

What is the SBA 504 Loan Program?

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 loans—starting with how business owners can use loan proceeds. 504 loans have strict requirements on how loan proceeds can be used, including:

• New construction (including constructing new buildings or modernizing/managing a renovation for an existing structure)
• New building purchase
• Land purchase
• Land improvements (for example, landscaping, adding utilities, or making street improvements)
• The purchase of machinery or other long-term equipment
• Refinancing eligible debt (which the SBA defines as debt “in connection with an expansion of the business through new or renovated facilities or equipment)

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:

• 50 percent bank loan. A direct lender (like a bank) issues 50 percent of the total project costs/loan amount.
• 40 percent CDC loan. 40 percent of the total loan amount is issued by a Certified development company, better known as a CDC. The SBA defines a CDC as “a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.”
• 10 percent down payment.  The business owner/borrower issues the final 10 percent of the total project cost as a down payment for the loan.

So, for example, let’s say you apply for a 504 loan to build a new brick-and-mortar store for your business—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 costs—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).

What are the eligibility requirements?

In order to qualify for a loan through the SBA 504 program, businesses must meet the following eligibility criteria:

• The business operates for profit
• The business is not engaged in nonprofit, speculative, or passive activities
• The business meets the size standards set by the SBA
• The business operates in the United States
• The business has a tangible net worth no higher than $15 million
• The business has an average net income of less than $5 million (after federal income taxes) for the two years prior to applying for the 504 loan
• The business must meet the SBA’s job creation, community development, or public policy goals
• Personal guarantee of at least 20 percent from the business owner(s)

Is the 504 Loan Program right for your business?

Some of the benefits of 504 loans include:

• High loan maximums. While the SBA will guarantee up to $5 million for 504 loans, that only covers the CDC portion. Because up to 50 percent of total project costs are covered by a bank loan, total loan maximums are actually significantly higher.
• Low down payment. 504 loans only require a 10 percent down payment, which lowers the upfront costs for the project.
• Fixed interest rates. 504 loans offer a fixed interest rate, which means you’ll know exactly how much your monthly payments will be, which can help with budgeting.
• Longer loan amortizations. 504 loans have loan terms of up to 25 years and offer longer loan amortizations and no balloon payments.

504 loans offer some serious benefits to small business owners—but they’re not without their drawbacks. Some of the potential downsides to the 504 Loan Program include:

• Limited flexibility. As mentioned, there are strict requirements for how you can use your 504 loan—which means you can’t spend the loan proceeds on things like working capital, inventory, or repaying debt.
• More complex loan structure. Because 504 loans are issued by both banks and CDCs, the qualification and application process can be more complex.

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 it’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 you’ll need to take to secure financing through the 504 Loan Program.