An SBA 504 loan is a government-backed financing program designed to help small businesses purchase or improve owner-occupied commercial real estate and long-term equipment through a fixed-rate, long-term structure.

The program is administered by the U.S. Small Business Administration (SBA) and funded through a partnership between a traditional lender, a Certified Development Company (CDC), and the borrower. SBA 504 loans are specifically intended to support long-term business growth, job creation, and local economic development. They’re most ideal for small businesses in the growth stage, looking to expand operations long-term.

When to use an SBA 504 loan.

SBA 504 loans exist to make large, long-term investments more affordable for qualifying small businesses, particularly when purchasing real estate or high-cost equipment that will be used for many years.

In many cases, these loans are used when a small business:

  • Wants predictable monthly payments through fixed interest rates
  • Is planning a long-term expansion, not a short-term cash flow need
  • Needs financing for assets that are central to operations, such as buildings or machinery

What SBA 504 loans can be used for.

SBA 504 loans are designed for specific, asset-based purposes. According to SBA 504 program guidelines, funds may be used for:

Real estate acquisition and development

  • Purchasing owner-occupied commercial real estate
  • Purchasing one or more existing buildings
  • Construction new commercial buildings
  • Expanding, converting, or renovating existing facilities
  • Acquiring land as part of an eligible project (not for speculation or future resale)

Site improvements

  • Grading and preparing land
  • Streets, access roads, and parking lots
  • Landscaping and drainage
  • Certain community improvements (such as curbs or sidewalks), generally limited to a small portion of total project costs
  • Energy-efficient or renewable energy improvements or equipment, when these improvements support the project facility, can be documented through an independent audit or report, and are not intended for energy resale.

Long-term equipment and fixed assets

  • Purchasing and installing fixed equipment with a useful life of at least 10 years
  • Equipment must generally be:
    • Permanently installed or affixed
    • Used at a specific, fixed location
  • In some cases, short-term financing for equipment, furniture, or furnishings may be permitted only if:
    • The items are essential to the project
    • They represent a minor portion of the total project cost

Project-related soft costs (Limited)

SBA 504 loan proceeds may include certain professional or administrative costs when they are:

  • Directly attributable to the eligible project
  • Necessary to complete the transaction

Examples may include appraisals, surveys, and title- related costs, or zoning/ permitting expenses.

Interim or Bridge financing (Limited)

SBA 504 loans may be used to repay short-term bridge or interim financing (typically three years or less), when that financing was used to cover eligible project costs prior to permanent funding through the 504 program.

What SBA 504 loans cannot be used for.

Because SBA 504 loans are intended to support long-term capital investment, they come with strict limitations on how borrowers can use the proceeds. These restrictions are especially important in distinguishing SBA 504 loans from more flexible SBA loan programs.

Here’s what SBA 504 loans cannot be used for:

Working capital and operating expenses

  • Day-to-day operating expenses
  • Payroll, rent, utilities, or marketing costs
  • Inventory, supplies, or raw materials
  • Short-term cash flow needs

Debt refinancing (with some exceptions)

  • Refinancing existing business debt not tied to eligible fixed assets
  • Refinancing for the purpose of freeing up working capital
  • Revolving or short-term debt structures

Investment or passive real estate

  • Rental or investment properties
  • Property not primarily occupied by the operating business
  • Speculative real estate purchases

Intangible assets

  • Business goodwill
  • Software or cloud-based services
  • Intellectual property

Land speculation or excess land

  • Purchasing vacant land for future development
  • Acquiring land in excess of current operational needs
  • Land intended for resale or lease to third parties

Ownership interests (with some exceptions)

  • Purchasing stock or ownership interests unless the transaction is structured to acquire eligible real estate or fixed assets
  • Any portion of a transaction that is attributed to goodwill or excess value must be financed separately

Clarifying SBA 504 vs. SBA 7(a) uses of proceeds.

Many SBA rules around use of funds vary by program. SBA 504 loans do not allow working capital, inventory purchases, or operating expense financing, even though these uses are often permitted under SBA 7(a) loans.

This distinction matters because:

  • SBA 504 loans are asset-focused and fixed-structure by design
  • SBA 7(a) loans are more flexible and can support broader business needs

While you can use SBA 7(a) loans for several allowed uses for SBA 504 funds, the reverse isn’t usually true. Understanding this boundary helps ensure you pursue the right SBA program based on the purpose of financing, not just loan size or rate.

Learn more about SBA 504 loans vs. SBA 7(a) loans.

The SBA 504 program is structured to promote:

  • Long-term business stability
  • Job creation
  • Owner-occupied property ownership
  • Capital investments with lasting economic impact

Because of this mission, SBA 504 loans are intentionally not designed for short-term liquidity or operational flexibility. If your business is seeking flexible capital for day-to-day needs, you might want to consider alternative SBA programs or non-SBA financing options.

SBA 504 loan eligibility: High-level requirements.

SBA 504 loans are designed for established small businesses making long-term, asset-based investments. While exact approval criteria will also vary by lender and Certified Development Companies (CDCs), the SBA has several program-specific requirements that borrowers must meet.

This section outlines the eligibility considerations unique to SBA 504 loans, not the full SBA program eligibility criteria.

Program-specific eligibility criteria for SBA 504 loans.

Owner-occupancy requirement

SBA 504 loans are limited to owner-occupied properties.

  • For existing buildings, the operating business must generally occupy at least 51% of the property.
  • For new construction, required owner occupancy is typically 60%, with the expectation that owners will occupy 80% within 10 years.

This requirement ensures 504 financing supports active business operations rather than passive real estate investment.

Eligible project type

SBA 504 loans are reserved for long-term, fixed-asset projects, such as:

  • Purchasing or constructing owner-occupied commercial real estate
  • Expanding or renovating existing facilities
  • Acquiring fixed equipment with a long useful life

Projects focused on working capital, short-term expenses, or speculative investment do not meet SBA program requirements.

Business stage and stability

SBA 504 loans are most commonly used by growth-stage businesses that:

  • Have established operations
  • Are planning long-term expansion
  • Can support extended repayment terms

While newer businesses are not automatically excluded, additional equity or documentation may be required depending on project structure and lender review.

Financial review and repayment ability

Rather than relying on a single qualification metric, SBA 504 loans are typically evaluated using a holistic financial review, which commonly considers:

  • Business financial performance and cash flow trends
  • Personal and business credit history
  • The long-term viability of the project being financed

Exact requirements vary by lender and CDC.

Eligibility rules that apply to all SBA loans.

In addition to the program-specific considerations above, SBA 504 borrowers must also meet the SBA’s general eligibility requirements, which address factors such ass:

  • Business type and lawful operation
  • Ownership and guarantor standards
  • Use of loan proceeds
  • Ability to obtain credit elsewhere on reasonable terms

Because these rules apply across multiple SBA programs, they are covered in detail in our comprehensive guide to SBA loan eligibility requirements.

When an SBA 504 loan may not be a fit.

An SBA 504 loan may not be appropriate if a business:

  • Needs working capital or flexible funding
  • Plans to purchase investment or rental property
  • Does not meet owner-occupancy requirements
  • Is seeking short-term or revolving credit

In these cases, other SBA loan programs or financing options may better align with the business’ needs.

SBA 504 economic development eligibility requirements (program-level).

In addition to standard SBA eligibility rules, all SBA 504 projects must meet at least one SBA-defined economic development objective. These requirements are specific to the 504 program and are evaluated at the project level, typically by the Certified Development Company (CDC), rather than solely by the borrower. 

This section explains how SBA 504 projects satisfy those program requirements at a high level.

Economic Development Objectives for SBA 504 projects.

Under SBA regulations, a 504 project must achieve at least one of the following economic development objectives to be eligible.

Job creation or job retention

Most SBA 504 loans qualify by demonstrating job creation or job retention.

  • Projects must generally support the creation or retention of at least one job opportunity per $90,000 of SBA-backed debenture.
  • For small manufacturers and energy-related projects, the threshold is higher.
  • Job retention may be used when a CDC can reasonably demonstrate that jobs would be lost if the project were not completed

Job opportunities do not need to be located directly at the project facility, however the majority of jobs must typically benefit the local community where the project is located.

Alternative Economic Development or Public Policy goals

If a project does not meet job creation or retention benchmarks, it may still qualify by advancing other SBA-approved public policy or community development goals. 

Examples include projects that support:

  • Community development initiatives
  • Rural development
  • Business district revitalization
  • Expansion in underserved or special geographic areas
  • Certain energy efficiency or sustainability objectives
Energy Public Policy projects (special category)

Some SBA 504 projects qualify under energy-related public policy goals, which follow additional SBA guidance.

At a high level, eligible energy public policy projects may include those that:

  • Reduce existing energy consumption by at least 10%
  • Generate more than 15% of the energy used at the project facility from renewable resources
  • Incorporate sustainable design elements that reduce environmental impact

These projects must be supported by third-party documentation, such as an energy audit or engineering report, verifying projected energy usage and savings.

Because these requirements are technical and project-specific, they are typically evaluated and documented by the CDC during the application process.

How Economic Development requirements affect borrowers.

For most borrowers, economic development eligibility is handled primarily by the CDC, not the business owner, but it’s helpful to know what the CDC will be looking for.

Borrowers will generally be responsible for:

  • Providing project details
  • Sharing employment estimates or operational impact
  • Supporting documentation requested during underwriting

The CDC will use this information to ensure the project aligns with SBA economic development objectives and complies with program requirements.

How SBA 504 loans work (Step-by-Step).

SBA 504 loans follow a structured process because they involve multiple parties. These include a traditional lender, a Certified Development Company (CDC), and the SBA. Exact timelines and requirements vary by lender and project type, but the process generally looks like this.

Step 1: Confirm your project is eligible.

Start by confirming your planned purchase or improvement fits SBA 504 guidelines. This is most commonly owner-occupied commercial real estate or long-term fixed equipment. The SBA 504 program is not intended for working capital, inventory, or investment property.

Step 2: Estimate your total project cost and financing structure.

Next, outline your full project budget (purchase price, construction costs, renovations, equipment, eligible soft costs). SBA 504 projects are financed through a shared structure between the lender and CDC, plus a borrower contribution.

Step 3: Choose a Certified Development Company (CDC).

SBA 504 loans are typically originated through a participating bank or lender and a CDC, which supports the SBA-backed portion of the financing. The CDC also helps document project eligibility and economic development objectives. You can find a CDC in your state via the SBA’s list of certified development companies, and they will typically discuss your project with you and help you find a participating bank or lender. You can also use the SBA’s Lender Match tool to find SBA-approved lenders participating in the 504 program.

Here is a guide to typical 504 financing structures based on business type or project purpose.

Typical 504 structures
Standard financing structure New Business OR Special Purpose Property Both New AND Limited or Special Purpose Property
Third Party Lender 50 50 50
CDC/SBA 40 35 30
Borrower 10 15 20

Step 4: Prepare your application package and documentation.

You’ll typically provide business and project documentation used for underwriting and SBA program review, such as:

  • Business financial statements and tax returns
  • A current debt schedule
  • Information about owners and guarantors
  • Project details (property, equipment specs, construction plans, budgets)

Exact documentation requirements will vary by lender, CDC, and transaction complexity. You can visit the SBA's 504 Authorization File Library to find the documents you will need for your loan package.

Step 5: Underwriting and eligibility review.

The lender and CDC will evaluate your application package to confirm:

  • The business and project meet SBA 504 requirements
  • Repayment ability and overall creditworthiness
  • Project structure and collateral considerations
  • Required program elements (such as owner occupancy and economic development objectives)

Step 6: SBA authorization and loan approval.

After underwriting, the CDC submits the required documentation for SBA authorization. Once approved, the financing moves towards closing.

Step 7: Close the loan and disburse funds.

At closing, the project is funded according to the approved structure. For construction or renovation projects, funds may be disbursed in phases based on project milestones.

Step 8: Begin repayment and meet ongoing reporting requirements.

After disbursement, repayment begins under the agreed term and structure. For SBA 504 loans, CDCs may also track program-related outcomes (such as job impacts) as part of SBA reporting requirements.

Pros and Cons of SBA 504 Loans.

SBA 504 loans offer meaningful advantages for certain long-term business projects, but they also come with limitations. Understanding both sides can help businesses determine whether this program aligns with their financing goals.

Pros of SBA 504 loans

  • Designed for long-term asset purchases - 504 loans are specifically structured to support major investments, making them ideal for expansion projects with lasting value.
  • Fixed interest rates - The SBA-backed portion of the loan is commonly offered at a fixed rate, which helps provide predictable monthly payments over the life of the loan.
  • Long repayment terms - Depending on the asset being financed, SBA 504 loans feature extended repayment periods, commonly from 10-25 years, which can help spread costs over time for large purchases.
  • Lower down payment requirements- In many cases, 504 loans require less upfront equity compared to traditional commercial real estate financing, although specific contributions will vary by project and borrower.
  • Supports economic development goals - The program is designed to encourage job creation, community growth, and long-term business investment.

Cons of SBA 504 loans

  • Limited use of proceeds- SBA 504 loans cannot be used for working capital, inventory, or most short-term business expenses.
  • More complex loan structure - Because SBA 504 loans involve multiple parties, including a traditional lender and a CDC, the process can be more involved than single-lender loans.
  • Longer approval timelines - Layered review and authorization processes often result in longer timeframes compared to non-SBA or conventional financing options.
  • Owner-occupancy requirements - Only owner-occupied properties qualify, which excludes investment or rental real estate projects.
  • Not ideal for early-stage or short-term needs - Businesses seeking quick access to capital or flexible funding may need to explore other loan programs.

How to decide whether an SBA 504 loan fits your project.

  • If your business is purchasing or constructing owner-occupied commercial real estate, then an SBA 504 loan is commonly used to finance long-term property investments tied directly to business operations.
  • If your business is expanding, converting, or renovating an existing facility it actively operates from, then SBA 504 financing may be relevant for the fixed-asset portion of that project.
  • If your business is purchasing long-term, fixed equipment that will be installed at a specific location and used over many years, then an SBA 504 loan may help finance those assets.
  • If your project involves energy-efficiency upgrades or on-site renewable energy improvements that can be documented through an energy audit or engineering report, then the project may qualify under SBA 504 energy public policy goals.
  • If your business is planning a large, long-term investment and prefers predictable payments through fixed interest rates, then SBA 504 financing may align with that goal.
  • If your business needs working capital, inventory funding, or short-term operational support, then an SBA 504 loan is typically not a fit, since the program is designed for fixed assets rather than flexible business expenses.
  • If your project involves investment or rental property that will not be primarily occupied by your operating business, then SBA 504 financing is generally not appropriate.

Bottom line: is an SBA 504 loan right for your business?

SBA 504 loans are a specialized financing program designed to support long-term, fixed-asset investments such as owner-occupied commercial real estate and permanent equipment. By combining a traditional lender, a Certified Development Company (CDC), and SBA-backed financing, the program helps eligible small businesses fund large projects tied to expansion, job creation, and economic development.

Because SBA 504 loans are purpose-built for asset-based growth, they are best evaluated based on project type, business stage, and long-term operational goals, rather than short-term funding needs.

Key Takeaways.

  • SBA 504 loans are designed for fixed assets, not working capital. They are commonly used for owner-occupied real estate, construction, renovations, and long-term equipment.
  • Eligibility is project-driven, meaning both the business and the proposed project must meet SBA program guidelines, including owner-occupancy and economic development objectives.
  • The loan structure is unique, involving a lender, a CDC, and SBA-backed financing, which can provide long repayment terms and predictable payments for qualifying projects.
  • SBA 504 loans differ from SBA 7(a) loans, particularly in use of proceeds, flexibility, and structure. Choosing the right program depends on how the funds will be used.
  • SBA 504 financing is typically best suited for growth-stage businesses planning long-term investments, rather than early-stage companies or businesses seeking short-term or flexible capital.

Businesses considering SBA financing often compare multiple loan programs before moving forward. Understanding how each option works—and when it applies—can help ensure the chosen financing aligns with long-term business goals.

Related resources.

Learn more about SBA loans:

Compare SBA financing options: