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The SBA 504 loan program: How it works

Long-term financing for major fixed assets, backed by the government.

This article was reviewed by Brad Stevens, a member of the Finder Editorial Review Board and 30-year veteran of the credit industry who specializes in rehabilitating struggling banks.

SBA 504 loan basics

  • Loan amounts: $5 million to $5.5 million for CDC portion
  • Terms: 10 to 25 years
  • Interest rates: Based on Wall Street Journal Prime rate and US Treasury rates
  • SBA guarantee: Up to 40% of project cost
  • Down payment: 10% to 20% of project cost
  • Best for: Real estate, construction, equipment and machinery

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.

What is a CDC?

A CDC is a nonprofit corporation that offers SBA-backed financing to small businesses that need funds to grow. All CDCs are certified and regulated by the SBA, though they’re not technically part of the government.

They function with the mission of promoting economic growth and development in local communities. Currently, there are over 260 CDCs in the country, and you can find one that serves your area on the SBA website.

Your local CDC may also be able to help you secure an SBA 7(a) loan as well, which provides financing for working capital, business acquisitions and inventory.

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.

CDC

Up to 40%

Up to 35%

Up to 30%

Third-party lender

Starting at 50%

Starting at 50%

Starting at 50%

Borrower

Starting at 10%

Starting at 15%

Starting at 20%

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:

  • Expand small businesses owned and controlled by women
  • Expand small business owned and controlled by veterans
  • Promote minority-owned companies
  • Develop rural areas
  • Revitalize the business district of your local community
  • Increase exports
  • Upgrade facilities to meet government standards
  • Reduce unemployment rates in a Labor Surplus Area
  • Increase competition and productivity
  • Help businesses located in or moving to areas affected by federal budget cuts

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.

What’s a Labor Surplus Area?

The US Department of Labor defines a Labor Surplus Area as a civil jurisdiction that has an average unemployment rate at least 20% higher than the national average for the past two years. A civil jurisdiction is a city with a population of at least 25,000 in the most recent census. Some towns and counties may also count as civil jurisdictions depending on where they’re located. You can find an updated list of Labor Surplus Areas on the US Department of Labor website.

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.

SBA 504 loan debt relief

The SBA is automatically paying interest, principal and fees on some SBA 504 loans as a form of COVID-19 debt relief. Here's how it works:

  • SBA 504 loans issued before March 27, 2021 can receive a total of five months of debt relief.
  • SBA 504 loans issued between March 27, 2020 and September 28, 2020 can receive a total of eight months of debt relief.
  • SBA 504 loans issued after February 1, 2021 can receive up to three months of debt relief.

But the SBA is in the process of phasing this program out. In June 2021, it only extended the debt relief program until the end of July 2021. It's possible it will be extended further, but not guaranteed.

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.

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.

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.

Name Product Filter Values Loan amount APR Requirements

Fora Financial business loans
Finder Rating: 4.1 / 5: ★★★★★

Fora Financial business loans
$5,000 – $500,000
Varies
6+ months in business, $12,000+ monthly revenue, no open bankruptcies
Get qualified for funding in minutes for up to $500,000 without affecting your credit score. Best for companies with at least six figures in annual revenue.

Lendio business loans
Finder Rating: 4.75 / 5: ★★★★★

Lendio business loans
$500 – $5,000,000
Starting at 6%
Operate business in US or Canada, have a business bank account, 560+ personal credit score
Submit one simple application to potentially get offers from a network of over 300 legit business lenders.

National Funding business loans
Finder Rating: 4.75 / 5: ★★★★★

National Funding business loans
$5,000 – $500,000
4% to 8%
Be in business at least one year and make at least $150,000 in annual sales. Other loan types have additional requirements.
Working capital loans and equipment financing, some high-risk industries may be eligible.

Fundbox lines of credit
Finder Rating: 4.2 / 5: ★★★★★

Fundbox lines of credit
$1,000 – $150,000
Not stated
6 + months in business, $100,000+ in annual revenue, 600+ credit score
Get flat rate, short-term financing based on the financial health of your business, not your credit score.

Bitty Advance business cash advances
Finder Rating: 2.8 / 5: ★★★★★

Bitty Advance business cash advances
$2,000 – $25,000
Not applicable
$5,000 monthly bank revenue, 6+ months in business, business bank account open 3+ months, 450+ credit score
With APRs in the triple digits, this is best saved as a last resort.
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Compare up to 4 providers

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:

Loan amount

Up to $5 million for most projects

Up to $5 million

Maximum interest rate

3.06% for CDC portion, 11.25% for bank portion

10%

Percentage guaranteed

Up to 40%

Up to 85%

Terms

10 to 25 years

5 to 25 years

Guarantee fee

0.5% of guaranteed portion

0.25% to 3.75% of guaranteed portion

Down payment

10% to 20%

15% to 20%

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.

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