The SBA 504 loan program: How it works

The US Small Business Administration (SBA) 504 loan program offers low-cost financing for large real estate purchases, construction projects, equipment and machinery. It offers be a great way to grow your business if you plan on expanding your company or ramping up production at a low rate.

But this program is designed for big projects that can help develop the business economy in your area. For working capital and smaller expenses, an SBA 7(a) loan, microloan or a traditional business loan could offer better options.

What is an SBA 504 loan?

An SBA 504 loan is a government-backed loan program to buy, lease, renovate or otherwise improve long-term fixed assets. Usually businesses use a 504 loan to fund costs related to real estate, machinery and equipment — and in some cases refinancing.

Regardless of how you use the loan, the project you finance should create jobs or otherwise help the government reach policy goals that aim to help develop the local economy.

504 loans come from two lenders

This loan program works differently than other types of SBA loans because the funding comes from two different lenders: a certified development company (CDC) and a third-party institution — usually a bank or credit union. Here’s how it usually breaks down:

• A CDC funds up to 40% of the loan
• A bank or credit union funds at least 50% of the loan
• The borrower makes a 10% down payment on the project

The SBA guarantees 100% of the CDC portion of a 504 loan, but not the third-party portion. That’s why the SBA has different requirements for the CDC and bank portions of the loan.

Higher down payments for startups and special projects

The SBA may require you to pay a higher down payment than the standard 10% in the following situations:

• Your business is less than two years old — what the SBA considers to be a new business.
• You’re funding a project involving a property that has a unique design — called a limited-market property.
• You’re funding a project involving a property used for one purpose — called a special-purpose property.

For example, financing to build a bowling alley is considered a special-purpose property because it’s made specifically for bowling.

Here’s how it breaks down depending on your time in business and loan use.

SBA 504 loans are for real estate, construction and major purchases

You can use an SBA 504 loan for the following expenses:

• Buying or construction projects on existing buildings or land
• Buying or renovating new facilities
• Buying new machinery or equipment
• Improving or modernizing land, streets, utilities, existing facilities and parking lots
• Improving or modernizing landscaping related to your business

You can also use an SBA 504 loan to refinance debt, as long as it’s related to an eligible project. This includes bridge loans you received to cover the cost of a project while you waited for to receive your SBA 504 loan.

The SBA doesn’t allow you to use a 504 loan for the following costs:

• Working capital or inventory
• Speculation or investment real estate
• Debt refinancing unrelated to an eligible project

SBA 504 loan requirements

The SBA 504 loan program has a few specific eligibility requirements that your business must meet to qualify:

• Tangible net worth under $15 million
• Average net income under $5 million after income taxes, for the past two years
• For-profit company
• Located in the US and its territories

You’ll also need to meet the general SBA loan requirements to qualify. This includes meeting the SBA size standards for your industry, operating in an eligible industry and having past experience in your industry.

SBA 504 loan refinancing requirements

The SBA recently added a refinancing program that comes with some additional requirements:

• Your business must be paying off the debt for at least two years
• At least 85% of that debt must have been used for an SBA 504-eligible purpose
• Your business can’t use the loan to also fund business expansion

Additional requirements for 504 loans

In addition to the basic eligibility requirements, your small business needs to either create jobs or meet a community development or public policy goal to qualify for a 504 loan.

Job creation

Most small businesses need to create one job in their community for every $65,000 that the SBA guarantees. The exception is manufacturers, which must create one job for every $100,000 funded.

Community development goals

The following qualify as community development goals, according to the SBA:

• Bring new income to the community
• Promote other business development
• Improve, stabilize or provide diversity to the local economy
• Assist manufacturing firms
• Help businesses in Labor Surplus Areas

Public policy goals

Here’s a list of public policy goals that could help your business qualify for funding:

Since each CDC works with a specific community, your local branch might have a slightly different definition for these community development and public policy goals. Reach out to your local CDC for more specifics.

SBA 504 loan amounts

Technically, there’s no maximum CDC loan amount. The SBA only limits how much you can borrow from a CDC.

• How much your business can borrow is based on the cost of the project.
• Most projects can qualify for $25,000 to $5 million for the CDC portion of the loan.
• Projects that reduce your business’s energy consumption by at least 10% or are otherwise involved in renewable energy can often get up to $5.5 million in CDC funding.

Since there’s no limit to your project costs, it’s up to the third-party lender to set the maximum amount for an SBA 504 loan.

Rates, fees and terms

The rates, fees and terms on your SBA 504 loan are ultimately up to your provider. But the SBA sets limits to how much lenders can charge and how long you can take to repay.

Rates

SBA 504 loans come with two interest rates: interest on the CDC portion of your loan and interest on the third-party portion of your loan.

• The maximum rate for the CDC portion on is based on the market rate for five-year and 10-year US Treasury bonds. These change regularly, but are usually around 3% or 4%.
• Third-party lender rates are the Wall Street Journal Prime rate + 6%.
• Both are fixed interest rates, meaning your rate won’t change throughout the life of your loan.

Learn more about how SBA loan interest rates work.

Fees

There are several different fees you might have to pay on your SBA 504 loan — both when you first take out the loan and during repayment.

Fees at closing

You might pay these fees when you take out an SBA 504 loan.

• The SBA charges a guarantee fee of 0.5% of the CDC portion of your loan.
• If your local CDC helps you put together your application, it may charge up to 1.5% packaging fee of the CDC portion of your loan.
• Your CDC may charge a closing fee to cover the costs of associated with making the loan, such as legal services or filing forms.
• You may have to pay an upfront underwriter’s fee between 0.375% and 0.4% of your total loan amount to cover the cost of evaluating your application.
• The SBA charges your third-party lender a one-time participation fee of 0.5% of the portion of the loan its funding that has a first position lien. However, your lender may pass this fee on to you.

Ongoing fees

Your business might also have to pay these fees as it repays the 504 loan.

• The company that collects your repayments may charge an annual servicing fee of 0.368% of your outstanding loan balance.
• Your central servicing agent (CSA) might also charge of 0.1% CSA fee to of your outstanding loan balance each year.
• If you don’t make your payment by the 15th of the month, your CSA may charge a late fee of 5% of the amount due or $100 — whichever is greater.
• Your CDC may also charge an assumption fee of up to 1% of the outstanding balance of your loan if you make a late payment.
• If you plan on making early loan payments, or want to sell off your asset before the loan is up to pay it off, your lender can charge a prepayment penalty.

Terms

SBA 504 loans come with different terms depending on how you use your funds.

• Real estate and construction loans come with a maximum term of 25 years.
• Equipment and machinery loans come with a maximum term of 10 years.
• For other purchases, the loan term can be 10, 20 or 25 years based on the average useful life of the items your business is financing.

Collateral is tied to your project or purchase

Generally, SBA 504 loans are backed by the property, equipment or machinery you purchase with the loan. Typically, the third-party lender gets a first lien position — meaning if you default, it can sell off your assets to collect the amount you owe first. The SBA usually takes a second lien position, meaning it would get access to your assets after your third-party lender collects what’s owed. Other times, the SBA and third-party lender share a first lien position.

You don’t need to provide any additional collateral or a larger down payment if your business meets the following requirements.

• It’s at least two years old. New businesses need to provide additional collateral on an SBA 504 loan.
• It has strong cash flow. Businesses must regularly have enough money coming in to afford the loan repayments.
• Your business’s management team must have proven experience with the type of project you’re trying to fund if you want to avoid putting up more collateral.
• The project is a logical extension of what your business currently does. In other words, your business needs to provide extra collateral if you’re trying to break into a new field with a 504 loan.

The SBA requires all business owners to buy insurance to protect collateral against hazards and other risks.

Personal guarantee

In addition to collateral, the SBA generally requires a personal guarantee from business owners with at least a 20% stake in the company. This means that all business owners are also partly responsible for paying back the loan if the business can’t.

How to apply

You might want to get started on your SBA 504 loan application by first reaching out to your local SBA district office. It can help you find the right CDC for your business’s needs.

Next, you can either find a third-party lender on your own or ask your CDC which lenders it typically works with. When looking for a bank or online lender, check its eligibility requirements — many have minimum credit score, time-in-business and revenue criteria you need to meet on top of the SBA’s requirements.

Once you’ve found a third-party lender and a CDC, your business works with both to complete the application. In addition, you’ll likely need to submit the following SBA forms.

• SBA Form 413: Personal financial statement
• SBA Form 159: Fee disclosure form
• SBA Form 912: Statement of personal history

You might also be asked to get your real estate or equipment appraised, or pay for an environmental impact report. From start to finish, it can take a few months before your business gets its funds.

Compare third-party SBA lenders

These providers offer SBA loans or can connect your business with an SBA lenders. But it’s possible that not all offer 504 loans — ask to make sure this loan program is available before you apply.

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SBA 504 loan statistics in 2021

This commercial loan program has slowed down in the past year — but only slightly.

• SBA 504 loan approvals saw a 3.3% drop in 2021. Some 6,511 applications were approved in fiscal year (FY) 2021, compared to 6,733 in FY 2020.
• The average SBA 504 loan was $818,179 in FY 2021 — but most loans were slightly smaller. The median loan was $527,000.
• SBA 504 loans supported a total of 54,602 jobs in FY 2021. That’s an average of 8.4 jobs per loan.

Uncertainty in the commercial real estate market and most business sectors are likely the reason why SBA 504 loan approvals were slightly down this year. In fact, we might have seen an even bigger drop without the SBA debt relief program. This made it easier for small businesses to weather the first few months of repayments.

Big states saw the highest number of approvals

Like with most SBA loan programs, larger states tended to receive the most funds in FY 2021.

• California received the highest number of SBA 504 loan approvals in FY 2021 by far. Businesses in the Golden State were approved for 1,383 loans.
• Florida came in second with 640 approved loans in FY 2021 — less than half of the number of California approvals.
• On the other end of the scale, Alaska, Maine and West Virginia didn’t receive any SBA 504 loan funding in FY 2021.
• Businesses in Puerto Rico received 30 SBA 504 loans.

Texas and New York, which often receive a high volume of SBA loan funding, trailed Minnesota and Utah when it came to approvals. However, the businesses that were approved for loans in those states received more funding on average than those in Florida, Minnesota or Utah.

Hospitality and healthcare professionals got the most funding

Industries that were forced to make the most changes in response to COVID-19 were approved for the highest number of loans and the highest average loan size.

• Full-service restaurants received the highest number of SBA 504 loans out of any industry, with 194 approved loans in FY 2021.
• Physician offices — excluding mental health specialists — and dentist offices round out the top three. Doctors received 187 504 loans, and dentists received 177 504 loans.
• Hotels received the highest SBA 504 per business compared to other industries, with a median loan size of $909,500.
• Culver’s Restaurant, a midwestern chain known for butter burgers and frozen custard, was the franchise that received the most SBA 504 loans, with 23 approvals.

This should come as no surprise. Businesses in these industries were forced to shut down or severely limit capacity at the beginning of the COVID-19 outbreak. But as vaccines became available and states lifted social distancing requirements, many of these businesses prepared for for a summertime surge.

However, we may see a change next year. Restaurants in particular have suffered a labor shortage that slowed growth more than expected and may need working capital financing instead.

SBA 504 vs. 7(a) loans

Still torn between the SBA 504 and 7(a) program? Let’s take a quick look at how they compare:

The SBA 7(a) loan program guarantees a much larger portion than the 504 program and has a relatively simpler application process — after all, there’s only one lender.

But getting approved for any kind of SBA loan can be difficult. While a 504 loan might have more restrictive eligibility requirements, that also means you’re competing with a smaller pool of applicants if you qualify. In this case, you might have slightly better odds of getting approved than borrowing through the SBA 7(a) loan program.

Bottom line

SBA 504 loans are for small businesses that are looking to expand by purchasing real estate or equipment. They have stricter eligibility requirements, however, and require a long and involved application. But if your business qualifies, you could have an easier time getting approved than going through the 7(a) program — especially if your project can help create jobs in your area.

Check out our SBA loans guide to learn what other programs might be able to help. Or read our guide to business loans to explore other financing options available.