sba 504 loan business plan

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SBA 504 Business Plan

Published Sep.05, 2023

Updated Apr.24, 2024

By: Alex Silensky

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Table of Content

The SBA 504 Loan Program offers an attractive financing option for small businesses looking to grow by acquiring fixed assets or equipment. Qualified companies can borrow up to $5.5 million per project with minimal down payment and interest rates below market. However, the 504 loan comes with eligibility requirements and the need for a solid business plan effectively crafted by an SBA business plan consultant . 

This article explains the program, how the unique 504 structure works, steps to apply, and how to write a compelling SBA 504 business plan.

What is the SBA 504 Loan Program?

The 504 Loan Program, offered by the SBA, finances small and medium businesses looking to buy or spruce up unmoving assets like real estate, operational equipment, and other fixed assets that boost business and create new jobs. The loans are partly issued and funded by certified development companies (CDCs) that are nonprofit corporations regulated by the SBA and partner with third-party lenders (typically banks). 

The maximum loan amount for a 504 loan is generally $5 million. Still, certain energy-efficient or manufacturing projects may qualify for up to $5.5 million per project for up to three projects to be at most $16.5 million. The borrower contribution is usually 10 percent.

The 504 Loan Program started in 1986 under the Small Business Investment Act 1958. This SBA program has since aided countless small businesses in getting reasonable financing to expand and modernize. The SBA says in fiscal year 2022, the SBA 504 Loan Program greenlit 9,254 loans totaling $9.2 billion and backed over 130,000 jobs.

SBA 504 Loan Eligibility Criteria

To be eligible for a 504 loan, you must satisfy several prerequisites that span basic criteria and additional stipulations unique to this program.

First, your business must check the boxes on standard qualifiers:

• Operate for profit within the US or territories
• Fall under current SBA size standards
• Maintain a tangible net worth of less than $15 million
• Report average net income below $5 million after taxes over the past two years
• Demonstrate job creation or other public policy goals per SBA definitions
• Avoid illegal, speculative, passive, or non-owner-occupied activities

Additionally, you must fulfill extra conditions specific to 504 loans:

• Submit a feasible business plan (for example, Loan Officer Business Plan ) and adequate cash flow to repay
• Present management with relevant experience and competencies
• Exhibit a clear need for fixed assets that will benefit operations and growth
• Use at least 51% of the property for your own business within one year if buying an existing building or three years if constructing
• Lack of accessible funds from other sources at reasonable terms

Meeting both the fundamental criteria and 504-specific stipulations is imperative for eligibility.

Typical Uses for SBA 504 Loan Funds

You can use the proceeds of a 504 Loan for the following purposes:

• Purchasing land and buildings (including existing buildings)
• Constructing new buildings or renovating existing buildings
• Purchasing machinery and equipment (including furniture and fixtures)
• Refinancing existing debt that is related to the project (subject to certain limitations and conditions)
• Paying for certain soft costs associated with the project (such as appraisals, environmental studies, architectural fees, etc.)

You cannot use the proceeds of a 504 Loan for the following purposes:

• Working capital or inventory.
• Consolidating or repaying interim loans.
• Financing other businesses.
• Speculating in real estate.

Carefully examining which purposes qualify and which are forbidden is crucial when deploying SBA 504 loan capital for approved needs without transgressing restrictions.

How To Apply for the SBA 504 Loan?

SBA 504 loans are offered through Certified Development Companies (CDCs), lenders specially qualified to provide 504 financing. 

The CDC structures the 504 loan, which consists of:

• A conventional first mortgage covering 50% of project costs
• An SBA-backed second mortgage covering up to 40% of eligible costs
• A 10-20% down payment contribution from the small business

The CDC partners with a conventional lender for the first mortgage portion and coordinates the SBA second mortgage financing.

To apply for a 504 Loan, you need to follow these steps:

Step 1: Find a CDC that serves your area. You can use the SBA’s online directory to search for CDCs by state or zip code.

Step 2: Contact the CDC and discuss your project with them. They will help you determine if your project is eligible and feasible for a 504 Loan. They will also help you find a private lender to participate in the program.

Step 3: Prepare and submit your loan application package to the CDC. The application package should include:

• Completed SBA Form 1244 application
• Detailed project description, including purpose, scope, cost, timeline, and expected benefits
• Business plan showing market analysis, growth potential, financial projections, management, goals
• Personal financial statement in SBA Form 413 and 3 years’ tax returns
• A statement of personal history in SBA Form 912
• Business financial statements and 3 years of tax returns (or since inception)
• Relevant business licenses, permits, contracts, leases, deeds
• Appraisal, environmental report, and architectural plans as needed for the project
• Any other documents requested by the CDC or lender

Step 4: Your lender and the CDC will review your application, and documents to verify you meet eligibility criteria and your project complies with SBA policies. They will analyze your credit and the feasibility of your project. 

If approved, your lender will issue a commitment letter and the CDC will authorize a debenture guaranteed by the SBA. The debenture is sold to investors to raise funds for your loan.

Step 5: After you receive the commitment letter and the debenture authorization, you must close the loan with your lender and CDC. The closing process may involve:

• Signing the loan documents and paying any fees or charges.
• Providing evidence of insurance coverage for the property and equipment to be financed.
• Providing any additional documentation or information requested by your lender or CDC.
• Receiving the loan proceeds from your lender and CDC.

SBA 504 Loan Business Plan

Your business plan is easily one of the most critical documents in your 504 loan application. Think of it as a roadmap that shows the CDC and lender you know what you’re doing. In your written plan, it would be best to show that you know your industry, customers, and financials well. The goal is to convince them your business idea is a winner.

Here’s the deal – a well-researched, accurate business plan can only help your chances at 504 loan approval. It shows the CDC, lender, and SBA you’ve done your homework and know how to make this business work. So, take the time to make it thorough, realistic, and compelling. Consider it your secret weapon in the loan application process.

To craft an effective business plan for your SBA 504 loan, you should include the following key elements that are specific to this type of loan:

Market Analysis and Growth Potential

The market analysis dives into the industry and target market. Pinpoint potential customers, their desires, purchasing patterns, and demographics. Also, investigate competitors’ assets, flaws, market share, and costs.

Clarify how the business separates from competitors and its unique value proposal. Provide proof of market need and growth possible through industry fads, customer input, studies, and sales info. This part should envelop the target market, their likings, competitor intel, how it stands out, and proof of demand and expansion openings.

Financial Projections

The financial projections section should provide detailed costs and revenues for your project over 3 years minimum. Include pro forma income statement, balance sheet, cash flow statement, and breakeven analysis. Provide sources and uses of funds statements showing how you will use the 504 loan and your equity contribution. 

Do a sensitivity analysis showing financial performance under different scenarios like sales, prices, costs, or interest rate changes. Explain the assumptions and methods behind the projections and provide supporting documents like historical financials, tax returns, contracts, invoices, or purchase orders. Check our Financial Advisor Business Plan for a better understanding.

Management Structure and Experience

The management structure and experience section should portray your organizational framework, management team parts, and obligations. Give data on the capabilities, abilities, understanding, resumes, confirmations, and licenses for every key individual included. Feature how the skills and capacities of your administration group will permit effective execution of your field-tested strategy and accomplishing your objectives.

Business Goals and Strategies

The business goals and strategies segment should diagram your particular, quantifiable objectives and how you will accomplish them. Clarify how the 504 credit will help you achieve your goals and advantage your business development, productivity, intensity, and work creation. Portray your procedures for advertising, activities, cost control, and hazard relief. Give a timeline, financial plan, achievements, and measurements to execute your arrangement and screen advance.

SBA 504 Loan Repayment

The repayment terms of an SBA 504 loan depend on the type of asset being financed. For machinery and equipment, the loan term is 10 years. For real estate, the loan term is either 20 or 25 years. The interest rates are pegged to an increment above the current market rate for 5- and 10-year U.S. Treasury issues, and are fixed for the duration of the loan. Since the rates are usually not as high as normal loans, the SBA 504 loan can seem like a good choice for small companies.

The repayment procedure of an SBA 504 loan is as follows:

Step 1: The borrower makes monthly payments to the CDC and the private sector lender according to the agreed-upon schedule and amount. The payments are usually made by automatic withdrawal from the borrower’s bank account.

Step 2: The CDC collects the payments from the borrower and remits them to the SBA’s Central Servicing Agent (CSA), which manages the servicing and accounting of the SBA 504 loans. The CSA also collects an annual service fee from the borrower, which is a percentage of the outstanding balance of the CDC portion of the loan.

Step 3: The private sector lender collects payments from the borrower and handles the servicing and accounting of its loan portion. The lender might also impose extra fees or penalties if payments are late, paid early, or not paid as agreed.

Step 4: The borrower can check their account balance, due date, interest rate, and other loan details by contacting their CDC or lender directly. The borrower can also see info about their loan online using SBA One, which lets borrowers look at and control their SBA loans.

Step 5: The borrower can prepay their loan without penalty if they notify their CDC and lender in advance. The borrower can also request a deferment or modification of their loan terms in case of financial hardship, subject to approval by their CDC and lender.

The SBA 504 loan can be an advantageous financing choice for small businesses looking to obtain or upgrade fixed assets that encourage growth and new jobs. By sticking to the payment process, borrowers can ensure they meet their duties and preserve a solid credit record.

OGSCapital – Your SBA Business Plan Consultant

Our team at OGSCapital understands how challenging and competitive it can be to get approved for an SBA 504 loan. We want to help your business put its best foot forward with a convincing business plan that captures your vision.

When you work with us, you’re not just getting a generic template – you’re getting a custom-crafted plan based on our team taking the time to understand your business deeply and what makes it special. We’ll conduct in-depth research and analysis so we can tell your story in a compelling way to lenders.

Our skilled business plan writers have helped thousands of real entrepreneurs and small business owners just like you get the funding they need. Our clients appreciate that we take the time to get to know them and their business dreams on a personal level. We have an over 98% success rate because we care and don’t take shortcuts.

If you could use some guidance in putting together a polished, persuasive plan that will give your SBA 504 loan application the best possible chance, please reach out . We’re happy to provide a free quote and discuss how we can help make your business vision a reality.

Frequently Asked Questions

Q. Are SBA 504 loans secured?

Yes, SBA 504 loans are secured by collateral, such as real estate, buildings, or equipment. The SBA guarantees up to 40% of the loan amount, while a third-party lender provides 50%, and the borrower contributes 10%. The SBA and the third-party lender may require a lien on the project assets and a personal guarantee from the owners.

Q. Are SBA 504 loans personally guaranteed?

Yes, most SBA 504 loans require a personal guarantee from anyone who owns 20% or more of the business. A personal guarantee is a legal agreement that holds you personally liable for the debt if your business defaults. The SBA may also ask for personal guarantees from other business owners or spouses who own less than 20% of the business.

Q. What is the interest rate on SBA 504 loan?

The interest rate on SBA 504 loans is fixed and determined at the time of funding. The interest rate is pegged to an increment above the current market rate for 10-year U.S. Treasury issues. As of August 2023, the SBA 504 loan rates are as follows:

• 10-year term: as low as 6.549%
• 20-year term: as low as 6.602%
• 25-year term: as low as 7.063%

OGSCapital’s team has assisted thousands of entrepreneurs with top-rate business plan development, consultancy and analysis. They’ve helped thousands of SME owners secure more than $1.5 billion in funding, and they can do the same for you.

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Home > Finance > Loans

A Guide to SBA 504 Loans

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SBA 504 loans not only help small business owners buy commercial real estate and long-term equipment , they also encourage economic development and promote job creation. 504 loans have helped create over 2 million jobs. 1 Here’s everything you need to know to help you apply and qualify for an SBA 504 loan.

A small business loan can help you when the time comes to invest in new business resources. But with so many small business loan options available, you can quickly get overwhelmed. Fortunately, the U.S. Small Business Administration (SBA) is a great resource for entrepreneurs who are on the market for a loan to start and grow their small business.

What makes SBA loans so useful? First, the SBA federally backs the loans so they’re less risky to lenders, making it easier for you to get a loan with lower interest rates. Plus, they have different types of SBA loans that all offer low interest rates, low down payments, and long-term financing. That’s a rare treasure worth taking if you can swing it. Note that they do have strict requirements, so you’ll have to wait a long time for funding. However, if you can qualify for an SBA loan, it’s well worth the wait.

Of the many SBA programs, the CDC/SBA 504 loan is one of the most popular—mainly because it offers unique benefits to businesses that qualify. SBA 504 loans are all about fueling the economy—they help business owners purchase land or buildings, improve existing facilities, purchase machinery and equipment, or purchase commercial real estate. Plus, they promote job growth in local communities.

If you’re looking for a small business loan to purchase commercial real estate or heavy equipment, the CDC/SBA 504 loan may be just the ticket.

Lendio partners with over 75 lenders, which improves your odds and efficiency to get the funding you need.

Qualifications:

$50k in revenue

6 mos. in business

560 credit score

SBA 504 loans table of contents

• SBA 504 loan overview

SBA 504 loan rates and terms

Sba 504 loan requirements.

• SBA 504 vs. 7(a)
• SBA 504 lenders
• SBA 504 calculator

The takeaway

Related reading, what is the sba 504 loan.

Think of the SBA 504 loan as a building block for small businesses that support local communities. As the SBA’s flagship loan program, CDC/SBA 504 loans are made available through Certified Development Companies (CDCs)—that is, nonprofit corporations that promote economic development within their communities—and are guaranteed by the SBA. Keep in mind that the 504 loan is specifically designed to promote business growth and create jobs. A qualifying company is expected to create one job for every $65,000 borrowed.

The CDC contributes 40% of the loan, while the bank or lender supplies 50%. The leftover 10% is the borrower’s responsibility.

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The 504 Loan program offers small businesses an array of benefits, including:

• 90% financing
• Fixed interest rates
• Improved cash flow

When you get an SBA 504 loan, you can expect to save on costs. Unlike other SBA loans, the SBA 504 loan program offers lower up-front fees and fixed interest rates, a huge bonus given the recent trend of rising interest rates. Currently, SBA 504 loan interest rates are 6.032% for a 20-year loan and 6.534% for a 10-year loan. Those are some stellar rates.

But your credit score can impact your rate. The higher your score, the lower the rate. SBA 504 loans are amortized (meaning scheduled debt repayments are made in regular installments) over 20 years, with no balloon payment. So you don’t need to worry about a massive final payment. Unfortunately, there’s a prepayment penalty on the 504 loan for the first half of the loan term.

In a perfect world, business owners would ask for and receive a loan with the snap of a finger. However, each lender has unique eligibility requirements that must be met before they hand over a big chunk of change. Before applying for any SBA loan, make sure you’re qualified.

• Two years of business history
• Personal credit score of 680 or higher
• Loan request of at least $30,000
• At least $100,000 in revenue for the past 12 months

For a CDC/SBA 504 loan, your business must fill at least 51% of the commercial building you’re financing and meet the local CDC’s job creation and economic growth goals. The requirements don’t end there. You may also need to show a solid business plan and how your expertise in your specific industry will help your business grow. So if you’re a startup, we recommend considering other business loan options.

Keep in mind that the SBA 504 application process tends to be more complicated and lengthy because of the multiple parties involved in the deal.

Most lenders take several factors into consideration when determining if a business owner is eligible. By understanding business loan requirements , you can boost your odds of securing a loan.

SBA 504 vs. 7(a): What are the differences?

Although both the 7(a) and 504 SBA loan programs benefit small businesses, each differs in their unique purpose. An SBA 7(a) loan has a few more uses and is designed to help businesses establish working capital, refinance debts, purchase equipment, and expand a business. Similar to the 504, the 7(a) loan requires a 10% down payment. The remaining 90% is covered by the bank loan. The maximum loan amount for SBA 7(a) loans is $5 million, whereas the 504 maximum loan amount is a whopping $20 million.

Depending on the type of purchase with a 7(a) loan, term lengths can vary:

• Working capital—7 years
• Equipment—10 years
• Real estate—25 years

SBA 504 loan terms are a smidge different:

• Equipment or machinery—10 years
• Real estate—20 or 25 years

If you’re not feeling like the SBA 504 loan is right for you, there are many other SBA loan programs to consider as you decide what’s best for your business.

SBA 504 Lenders

Lendio isn’t your typical lender. In fact, it doesn’t provide loans at all. Confused as to why they made our list? Think of them as the Kayak or Expedia of business loans. Lendio’s online marketplace matches the borrower with a lender. Its proprietary algorithm aggregates loan options from networks of business lenders, including traditional banks, to help you find the right option for your business.

Although Lendio provides a slew of loan options for small businesses, browse other lenders if you’re looking for fast funding. Unfortunately, SBA loans through Lendio can take up to 30 to 90 days to fund. To help navigate your SBA loan options, we recommend contacting your loan manager.

Wells Fargo

Wells Fargo is one of the few large banking institutions that still works with small businesses after the 2008 economic crash. Keep in mind, however, that there’s a surprising amount of customer complaints and negative press against Wells Fargo.

When partnering with Wells Fargo, you can seek an SBA 504 loan amount of up to $6.5 million. Its terms are up to 20 years on real estate and up to 10 years on machinery or equipment. Depending on your specific loan, you may be required to pay fixed or variable rates.

Bank of America

Bank of America is another big and powerful bank. This loan powerhouse offers SBA 504 loans starting at $100,000 (limited time offer until July 12, 2023). They only consider borrowers who need equipment, commercial real estate, construction, or renovation. Here are a few more details about Bank of America’s SBA 504 terms:

• 7–10 years on equipment
• 10–20 years on real estate
• Up to a 2-year construction period

Don’t forget to consider those pesky hidden fees. Keep in mind that this bank loan will also include an origination fee. For real estate loans, you may have to pay fees for an appraisal, environmental reviews, and filing fees.

JPMorgan Chase Bank

Joining Wells Fargo and Bank of America, JPMorgan Chase Bank is considered one of the “big four” banks. These "big four" banks hold 39% of all U.S. customer deposits. 2 When partnering with JPMorgan Chase Bank, you’ll benefit from their lower down payment, favorable fixed-rate financing and pricing, and an unlimited loan amount.

Their standard SBA terms are 10 years for equipment or 20 years for real estate, with up to 30-year amortization.

SBA 504 Calculator

Before signing on the dotted line, you’ll likely want to know the amount of your monthly payment. Typically, loan sums are determined by the borrower’s credit score, profit and loss statements , and purpose for the loan. Loan payment amounts are estimated by loan sum, interest rate, term rates, and guarantee fees.

To estimate your SBA loan payments, consult a free SBA loan payment calculator .

With several different types of SBA 504 lenders available, you’re sure to find a financing option that will help you fund your important business assets—such as land or equipment.

As long as you meet their basic requirements and have some patience during their lengthier evaluation period, you’ll likely be rewarded with a loan that is much more affordable (in terms of interest rates and down payments) than other typical business loans that aren’t governmentally regulated.

We hope you found our article helpful and can find the resources, or funding, you need for your small business to grow and flourish.

• What Is the SBA Loan Process?
• Your Small-Business Loan Requirements Checklist
• A Guide to SBA 7(a) Loans
• SBA Business Loan Calculator: Estimate Your SBA Term Loan Costs
• What is an SBA Loan? SBA Financing Options 101

SBA 504 requirements FAQ

A 504 loan can be used to purchase fixed assets that “promote business growth and job creation,” according to the SBA. This could include a new building, equipment, streets, facilities, or machinery.

Yes, it requires a personal guarantee along with all the other SBA loans. 

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

• U.S. Small Business Administration, “ Office of Financial Assistance Resources .” Accessed January 3, 2023.
• Statspotting, “ Banking Statistics: The ‘Big Four’ Banks Hold 39% of All U.S. Customer Deposits .” Accessed January 3, 2023.

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SBA 504 Loan 101: Benefits, Guidelines, and Eligibility

SBA 504 Restrictions and Requirements

As with any government loan process, you must pass multiple checkpoints to reach eligibility. After committing to the SBA 504 loan program, you will need to consider if your business matches the preconditions. The experience can be demanding, so it’s vital to understand the policies to avoid delay and pushback. 

To gain government approval for your SBA 504 loan, you must have the following:

• A concrete net worth of less than $15 million 
• An average after-tax net income of less than $5 million over the past two years
• A United States business permit
• Certified management experience
• A solid business plan
• The intention to use the loan proceeds for fixed asset acquisition or improvement (land and buildings, machinery and equipment, or construction)
• The means to repay the loan

Other factors are involved in increasing your chances, like being a for-profit enterprise, having a good credit score, and having less than 500 active employees. Working with an experienced lender will help you navigate the process and attain your small business loan as efficiently as possible.

How to Secure an SBA 504 With 504 Capital:

Now that you know the basics of the SBA loan process, let’s dive into 504 Capital’s step-by-step guide on how to apply for your SBA 504 loan.

Seek a Certified Development Company

The SBA 504 lending program is unique because it requires you to rely on a CDC and private lender versus a sole SBA lender. Your CDC advisor bridges the gap between you and your economic growth by guiding your enterprise through the process. The SBA compiled a list of CDCs to help you get started.

After you’ve met your CDC, you’ll need to review your finances to check if you’re eligible. Prequalification is an intelligent way to get a head-start on the 504 approval process—and if you’re a real estate investor—it grants you the advantage to compete against other buyers before sending your formal application.  

You will also need to present several essential documents to demonstrate your business’s financial position, including personal and business financial statements and tax returns (over the past three years).  And although the SBA 504 loan program doesn’t have a minimum credit score requirement, you should have a healthy credit score to highlight your ability to repay the loan.

Send Your Application

Next, you will need to prepare all required documents for submission. Begin by filling out the SBA 504 loan application with the oversight of your designated CDC. You must illustrate your business’s ownership structure, history, and financial information here. The SBA website includes an archive of resources to assist your application, including a 504 Authorization Library, Development Company 504 Debenture, and more.

Be prepared to provide SBA with the following additional information:

• A solid business plan projection
• Personal and business financial statements
• Personal and business tax returns (past three years)
• Active bank accounts
• Construction contractor estimates
• Equipment cost documentation

Close on Your Small Business Loan

After the application has been submitted, it will be reviewed by the SBA and the lending institution. It generally takes one week for the SBA to decide and two weeks to gain the funds. If approved, the loan will be processed and dispersed according to the terms of the loan agreement.

Abide by Post-closure Conditions

After closing, you must communicate with the SBA on any business-related updates. Some factors to be discussed include ownership changes, evidence of taxes paid (real estate and corporate), financial statements, proof of hazard insurance, life insurance, and any additional financing.

Benefits of an SBA 504 Loan

If you’re a successful business owner or manufacturer focused on expanding your enterprise and fixed assets, this small business loan may be the perfect match for you.    

SBA 504 Program Pros:

• Low down payment
• Up to 90% financing coverage
• Below market fixed interest rate
• Long, flexible amortization periods
• Does not take large business assets as collateral
• Helps working lines of capital credit
• Minimizes credit risk
• Fixed asset financing

504 Capital: Your SBA 504 Provider

Applying for an SBA 504 loan is a commitment— as is your devotion to your business. Luckily, our Certified Development team of professionals at 504 Capital is at your a id in the VA , MD , and NC areas to support your business evolution.

Take the reigns on your business’s future. Call 757-623-2691 or contact us online to discover new opportunities. 

• 10 Min. Read

SBA 504 Loan: What It Is and How to Apply [2024 Guide]

• Updated June 3, 2024
• Published June 3, 2024

Have you been looking into long-term financing options for your business? If so, you’ve probably come across the U.S. Small Business Administration (SBA) 504 Loan Program during your research.

This program can be a game changer for small businesses seeking affordable capital to purchase, upgrade, or build on assets like real estate and equipment. But how exactly does an SBA 504 loan work, and are you eligible?

This article will explain everything you need to know in simple and practical terms so you can decide if an SBA 504 loan is a good fit for you.

What is an SBA 504 Loan?

An SBA 504 loan, or a “CDC/504 loan,” is a small business loan that’s funded by a third-party lender and a Certified Development Company and backed by the SBA. It can be used to purchase real estate, heavy equipment, machinery, furniture, and fixtures. It can also be used to construct or upgrade facilities, refinance commercial debt, or facilitate a change of ownership in your business. The goal of this program is to promote business growth and job creation.

How SBA 504 Loans Work

Unlike SBA 7(a) loans , SBA 504 loans are comprised of three funding sources:

• Third-Party Lender. This is generally a commercial bank or credit union.
• Certified Development Company (CDC). This is a non-profit entity that is certified and regulated by the SBA. CDCs work closely with third-party lenders to package, process, close, and service 504 loans.
• Borrower. This is the individual responsible for taking out the loan.

In most cases, the third-party lender provides 50% of the loan amount, the CDC provides 40%, and the borrower provides 10% as a down payment or equity injection. Mind you, there are some situations (e.g., new businesses and/or limited or special purpose properties) where the loan structure will vary.

A new business is one that has been operating for two years or less at the time the loan is approved.

A limited or special purpose property is one that has “a unique physical design, special construction materials or a layout that restricts its utility to the use for which it was built.” Some common examples are bowling alleys, car washes, gas stations, hotels, nursing homes, and wineries.

SBA 504 Loan Features

Like all financing products, SBA 504 loans have specific features that dictate how much you can borrow, how much it will cost, how the funds may be used, and more.

Interest Rate

For the CDC’s portion of the loan, the interest rate is fixed and set at an increment above the market rate for five- and 10-year U.S. Treasury notes at the time of sale.

* The current 504 rates as of May 2024 are 6.55% (25-Year SBA 504), 6.57% (25-Year SBA 504 Refinance), 6.65% (20-Year SBA 504), 6.68% (20-Year SBA 504 Refinance), 6.89% (10-Year SBA 504), and 6.89% (10-Year SBA 504 Refinance) .

For the third-party lender’s portion of the loan, the interest rate may be fixed or variable and set at increment above the prime rate at the lender’s discretion. Fortunately, this rate is still capped by what the SBA deems reasonable.

*The current prime rate as of May 2024 is 8.50%. Check out the SBA’s  FTA Wiki  page for the latest prime rates.

It is helpful to understand that a CDC is not a bank and, therefore, does not hold funds. When an SBA 504 loan is made through a CDC, its portion is raised via a “debenture” or bond sale. There are also administrative costs that the SBA charges, which are often passed on to the borrower.

When borrowers apply for an SBA 504 loan, they’re given a “net debenture” and “gross debenture” amount. The net debenture is the CDC’s portion of the loan, and the gross debenture is the CDC’s portion plus the SBA’s administrative costs.

For the CDC’s and third-party lender’s portions of the loan, the following may apply:

• Guarantee or Guaranty Fee. This is a fee that the SBA charges for loans it guarantees under the 504 program. For the 2024 fiscal year, the fee is 0.0%, so it wouldn’t apply .
• Borrower’s Deposit. This is a deposit of $2,500.00 or 1% of the gross debenture amount (i.e., the CDC’s portion of the loan) that the CDC collects from the borrower when their application is ready to be submitted. If the borrower’s application is denied, their deposit will be refunded. If the borrower’s application is approved, their deposit may be refunded, or they can apply it toward the CDC’s other fees. However, if the borrower withdraws their application before a decision has been made, their deposit may be forfeited.
• Processing or Packaging Fee. This is a one-time fee of 1.5% of the gross debenture amount that the CDC charges for processing the borrower’s application.
• Funding Fee. This is a one-time fee of 0.25% of the gross debenture amount that the CDC charges for the public issuance of securities and the Trustee. Combined with the processing fee, it is comparable to an “origination fee” for a conventional loan.
• Annual Servicing Fee. This is an ongoing fee of 0.364% of the outstanding balance that the CDC charges to cover the overhead costs associated with servicing the borrower’s loan.
• Underwriter’s Fee. This is a one-time fee that the CDC’s underwriting agent charges for organizing and evaluating the borrower’s application. It’s equal to 0.375% of the gross debenture amount for 10-year loans and 0.4% for 20- and 25-year loans.
• Closing Costs. This a one-time fee that the CDC charges for appraisals, legal work, and other miscellaneous costs that may be applicable at closing.
• Late-Payment Fee. This is a fee of $100 or 5% of the monthly payment amount, whichever is greater, that the CDC charges when the borrower misses a payment.
• Prepayment Fee. This is a fee that the CDC charges the borrower if they pay off their loan early. It’s equal to the first year’s interest, and it declines by 20% each year for 10-year loans and 10% for 20- and 25-year loans.
• Lender’s Participation Fee. This is a one-time fee of 0.5% of the first lien (i.e., the third-party lender’s portion of the loan) that the third-party lender charges.

Most of the fees listed will roll into the total loan amount, so the primary upfront cost is the borrower’s down payment of 10-20%.

Use of Funds

Here’s a definitive list of all the 504 loan use cases included in the SBA’s guidelines:

• Purchases or Leases of Land for an Eligible Project
• Site Improvements (e.g., Landscaping, Land Grading, Road and Parking Construction)
• Purchases of One or More Existing Buildings
• Conversions, Expansions, or Renovations of One or More Existing Buildings
• Construction of One or More Buildings
• Purchases or Leases of Heavy Equipment and Machinery
• Refinances of Existing Commercial Real Estate Debt (Including SBA Loans)

504 funds may not be used for working capital, purchases of inventory, speculative items or investments, AI-related working capital, intellectual property, or consultative services.

SBA 504 Loan Requirements

Not all businesses will qualify for an SBA 504 loan. You’ll need to meet the Administration’s minimum requirements as well as those set by your CDC and third-party lender. Usually, this includes the following:

• You’re legally registered as a for-profit business.
• You operate and have a physical location in the United States or its territories.
• You satisfy the SBA’s definition of a “ small business .”
• Your net worth is less than $15 million.
• Your average net income was less than $5 million after taxes for the last two years.
• You’re able to demonstrate the need for a loan and describe the purpose for which you’ll use the funds.
• You’re able to show your ability to repay the loan.
• You’re not delinquent on any existing government loans.
• You’ve sought alternative financing options before applying for an SBA 504 loan.
• You’re not an ineligible business such as a non-profit organization, financial institution, gambling entity, government-owned corporation, or speculative business.

In addition to the requirements listed, your CDC and third-party lender may have other criteria — such as personal credit and income — you’ll need to meet.

What’s more, all individuals who own 20% or more of the borrowing entity must sign a personal guarantee.

How to Apply for an SBA 504 Loan

If you determine a 504 loan is right for you, here are the steps you’ll take to apply:

1. Find an SBA 504 Broker or CDC

Research SBA 504 brokers online and CDCs in your area. An experienced SBA 504 broker, like 1st Capital Financial , will have third-party lenders and CDCs in their network and may offer more flexibility when structuring your loan at little to no additional cost. Alternatively, you can work with a CDC directly .

2. Gather the Documents for Your Application

As with an SBA 7(a) loan application, your 504 loan application will require a lot of paperwork. While your chosen broker or CDC should be able to assist you, you can get a head start by collecting the following:

• SBA Form 912 (“Statement of Personal History”)
• SBA Form 413 (“Personal Financial Statement”)
• SBA Form 1244 (“Application for Section 504 Loans”)
• Copies of Your Business’s Financial Statements (e.g., Balance Sheets, Debt Schedule, Profit and Loss Statements, and Financial Projections)
• Copies of Income Tax Returns
• Copies of Business License(s) and Registration(s)
• Copies of Articles of Incorporation and Bylaws, or Operating Agreement
• Copy of Business Plan With Relevant Overview, Company History, and Owners’ Resumes
• Previous Loan Application(s)
• Project Information (e.g., Purchase Agreements or Options to Acquire Real Estate, Appraisal of the Real Estate to Be Acquired, Cost Estimates for Construction, Machinery, and Equipment)

Once you have all the documents and information on hand, it’s time to submit your SBA 504 loan application with your broker or CDC. Be ready to respond to additional requests.

3. Secure a Pre-Approval and a Third-Party Lender

You’ll need a pre-approval decision from a CDC and a third-party lender before your application package can be submitted to the SBA. Bear in mind that these are separate parties with their own criteria, underwriting procedures, and timelines. If an appraisal and environmental review are required, they’ll be ordered on your behalf.

4. Close and Receive Loan Funds

It’ll take five to 10 business days for the SBA to process your 504 loan application and provide an approval decision. Once approved, the closing process begins, and you’ll be asked to sign the final documents. Note that it’ll take 30 to 60 days following the SBA’s approval decision for your loan to fund.

FAQs About SBA 504 Loans

It may be harder to get approved for an SBA 504 loan compared to the Administration’s other loans. This is due to the program’s unique project criteria, and comparatively lower cost and longer repayment terms. However, as it’s still an SBA loan, it’s considered easier than a conventional loan.

The time it takes to fund an SBA 504 loan depends on the project specifications, as well as the CDC and third-party lender that are involved. On average, it’ll take 60 to 90 days from the time you start your application to fund the loan.

The SBA will guarantee the entirety of the debenture that’s raised by the Certified Development Company (CDC). This means that up to 40% of the loan is guaranteed.

Yes, you can pay off an SBA 504 loan early — but there’s a prepayment penalty that may apply. Prepayment penalties are equal to the first year’s interest and decline by 20% each year for a 10-year loan and 10% each year for 20- and 25-year loans. At year six or 11, the penalty would be zero.

The 90% rule suggests that if the appraisal of a fixed asset that’s part of an SBA 504 loan comes back at less than 90% of the estimated value, the loan amount must be reduced or the borrower must provide additional collateral.

SBA 504 Loan Alternatives

504 loans are not one-size-fits-all products. If your project requires more utility, you may want to consider one of these alternatives:

• SBA 7(a) Loan. The SBA’s 7(a) loan program lets you borrow up to $5 million and offers a lot of elasticity when it comes to the use of funds. If your expenditures include working capital or inventory, a 7(a) loan may be a better fit.
• Equipment Financing. Equipment financing allows you to borrow up to $5 million for equipment purchases, repairs, and upgrades. Since these loans are collateralized by the equipment being financed, the eligibility requirements are more lax than those of SBA loans.
• Business Line of Credit. A business line of credit provides you access to $50,000 to $2 million and more flexibility than a business credit card. Since it’s a revolving loan, you can borrow, repay, and borrow again while only paying interest on what you use. If timing is a concern or working capital is what you need, a line of credit may be a good option to consider.

Get Started With 1st Capital Financial

The SBA’s 504 loan is an extraordinary financing mechanism for small businesses with unrivaled rates and term lengths. Though the application process may seem daunting and complex, it’s worthwhile for those with an eligible project.

If a 504 loan interests you or you have questions, we urge you to start your SBA application online with 1st Capital Financial. The company will be your matchmaker when it comes to finding a CDC and partnering with a third-party lender, guide for gathering paperwork, and mentor for avoiding common pitfalls.

Apply for an SBA 7(a), Express, or 504 Loan Today

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1st Capital Financial and its affiliates assume no liability for actions taken in reliance upon the information contained herein.

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