SBA 504 Loans: The Complete Guide

What is a SBA 504 Loan?

The SBA’s 504 loan program provides long-term financing for real estate, equipment, and other fixed assets. These loans are partially funded by Certified Development Centers (CDC), certified through the SBA.

The maximum loan amount is $5 million, though there are exceptions for specific energy projects. In this case, a borrower can receive $5.5 million per project for up to three projects not exceeding $16.5 million. 

What Are 504 Loans Used For? 

SBA 504 loans are designed to promote business growth and job creation through the purchase of real estate or other long-term assets. They can be used to purchase the following long-term assets:

• Existing real estate or land
• New facilities
• Long-term equipment and machinery
• Updates to new or existing real estate
• The improvement of land, streets, utilities, and parking lots

However, a 504 loan cannot be used for speculative real estate investments, working capital, or inventory. 

How Does the Application Process Work?

Applying for a 504 loan is a bit different since the loans are only available through CDCs. You’ll start by finding a CDC location in your area — more than 200 centers are located across the U.S.

Once you’ve found a CDC, you need to get prequalified to see what your business is eligible for. Getting prequalified won’t hurt your credit score, and the process is much less rigorous than the full application process.
Once you’re ready to submit a formal loan application, you can use the 504 Authorization File Library to see what documentation you need. It typically takes the SBA about a week to approve or deny your application, but it could take several months to close on the loan and receive the funds.

Eligibility requirements

You must meet the following requirements to qualify for a 504 loan:

• Operate as a for-profit company 
• Do business in the United States or U.S. territories
• Have a net worth below $15 million
• Have an average net income below $5 million after taxes for the two years prior to your application

In addition, borrowers have to meet general eligibility standards set by the SBA.

Pros and Cons to Consider

Pros

• Low interest rates: Interest rates are limited by the SBA, so they tend to be lower than what most lenders offer. And the interest rate is fixed, so it won’t change throughout the life of the loan. 
• Lengthy repayment terms: SBA 504 loans also come with generous repayment terms. If you purchase equipment, you’ll have a 10-year repayment term. But real estate comes with 10-, 20-, and 25-year repayment terms.
• Low down payment requirements: When you take out a 504 loan, you’re required to pay a 10% down payment which is lower than what most commercial lenders require.  

Cons

• Comes with a personal guarantee: The SBA requires a personal guarantee on all of its loans, including 504 loans. A personal guarantee means the lender has a right to pursue the owner for loan repayment if the business defaults on the loan. 
• Rigorous application process: The SBA is known for its extensive documentation requirements — it could take a couple of months to close on the loan and receive the funds.

SBA 504 Loan Alternatives

If you’re unsure whether a 504 loan is the best option for your business, there are other options you can consider. Here are a few SBA 504 loan alternatives:

• SBA 7(a) loans: An SBA 7(a) loan is another loan that’s backed by the SBA. These loans are typically used for working capital, equipment, and refinancing business debt. Loans are available for up to $5 million with repayment terms up to 25 years.  

• SBA Express loans: SBA Express loans are available for up to $500,000, and the rates may be slightly higher than other types of SBA loans. But the turnaround time is less than 36 hours, so it’s a good option for anyone looking for faster funding. 

The Bottom Line

If you want to purchase commercial property or other fixed assets for your business, you should consider an SBA 504 loan. These loans come with a 10% down payment, low rates, and longer repayment terms. 

But if you want to put some of the funds toward working capital needs or refinancing debt, you can look into a 7(a) loan instead. If you’re ready to get prequalified for an SBA loan, you can use Lendio to quickly compare loan offers from multiple lenders.