The Ultimate Guide to SBA 504 Loans

If your business is looking for long-term financing to fund real estate or equipment, look no further than the SBA 504 loan.

While these loans have strict requirements and a lengthy application process, Small Business Administration CDC/504 loans reward eligible borrowers with long repayment terms and low fixed interest rates. Keep reading to learn more about this popular SBA loan program.

What Is An SBA CDC/504 Loan?

The SBA CDC/504 Loan Program is a financing program backed by the Small Business Administration. The goal of the program is to support small businesses by promoting business growth and job creation. Eligible small businesses may receive loans up to $5.5 million through this program. 

The SBA connects recipients with a Certified Development Company (CDC). CDCs are non-profit organizations that are certified and regulated by the SBA. These CDCs provide fixed-rate, long-term financing in partnership with lenders and the SBA.

How The SBA 504 Loan Program Works

The CDC/504 loan program works a little differently than other SBA loan programs. This is primarily because two lenders are involved in funding a single project. Here’s how it breaks down:

• Up to 40% of funding is provided by a CDC
• Up to 50% of funding is provided by a private lender, such as a bank or credit union
• A minimum of 10% of funding is provided by the borrower

The SBA guarantees 100% of the portion of funds provided by the CDC.

How Can SBA 504 Loans Be Used?

Often, 504 loans are referred to as SBA Real Estate Loans or SBA Commercial Real Estate Loans because of their strict usage policies. Proceeds from an SBA 504 loan can only be used for fixed assets.

SBA 504 loans can be used for:

• Purchasing an existing building
• Constructing new facilities
• Renovating existing facilities
• Purchasing or improving land
• Purchasing machinery and equipment for long-term use
• Refinancing debt in connection with renovating facilities or equipment

Funds from an SBA 504 loan can’t be used for working capital, inventory, or consolidating debt.

If you need a more flexible funding option, consider SBA 7(a) loans, which can be used for nearly any small business expense.

SBA 504 Loan Soft Costs

The SBA 504 loan can be used to fund a project in its entirety. This may include certain “soft costs” including:

• Fixtures
• Furniture
• Professional fees
• Closing costs
• Appraisals
• Construction interest
• Environmental reports

Your CDC can explain more about expenses that are eligible to be covered using SBA 504 loan funds.

The Pros & Cons Of SBA 504 Loans

SBA 504 Loan Program Advantages

Businesses that need to purchase commercial real estate or long-term equipment will like what SBA 504 loans have to offer.

SBA 504 Loan Program Disadvantages

While there are benefits to SBA 504 loans, there are a few drawbacks to keep in mind.

SBA 504 Loans VS 7(a) Loans

504 loans and 7(a) loans are two of the most popular SBA funding programs. There are a few distinct differences if you’re undecided on which to choose.

One of the biggest differences is how funds are used. SBA 504 loans are used for real estate or equipment. SBA 7(a) loans offer more flexibility and can be used for most business purposes, including purchasing inventory, acquiring a business, covering startup costs, using as working capital, or refinancing high-interest debt.

SBA 7(a) loans are also provided by an intermediary lender, such as a bank, credit union, or other financial institution. CDC/504 loans require two lenders — the CDC and a private lender.

Finally, the cost of each loan may differ. While the SBA 7(a) loan typically has lower fees, interest rates may be variable. The CDC portion of CDC/504 loans has fixed rates, although the portion funded by another lender may be fixed or variable.

How To Qualify For SBA 504 Loans

To be eligible for an SBA 504 Loan, there are strict requirements a business must meet. Here’s how to qualify for an SBA 504 loan. 

SBA 504 Loan Terms

Before applying for an SBA 504 loan, it’s important to understand borrowing limits, interest rates, and ongoing fees.

Borrowing Limits

There is no maximum project size for businesses applying for a 504 loan. The maximum portion funded by the CDC can’t exceed $5 million for most businesses.

Small manufacturers and businesses planning an eligible energy project may qualify for up to $5.5 million. 

Current SBA 504 Loan Rates

SBA 504 loans are fixed-rate, long-term loans. SBA 504 loan rates are set by the current market rate for 5-year and 10-year Treasury issues plus a spread to the bond investor.

Using an SBA loan calculator can give you an idea of the cost of your loan.

SBA 504 Loan Fees

SBA 504 loan fees vary by lender but may include:

• SBA guarantee fees
• CDC servicing fees
• Central Servicing Agent fees
• Bank fees
• Third-party fees
• Prepayment fees

The CDC/504 Loan Application Process

The 504 Loan application is roughly thirteen pages long and requires information including project cost, energy efficiency goals, and debenture pricing. 

Businesses applying for a 504 Loan should be prepared to provide evidence of eligibility, indebtedness, and creditworthiness. 

Once the application is completed, it should be submitted to the CDC, which will then forward the information to the SBA Loan Processing Center.

The entire process, from start to finish, takes an average of 60 to 90 days. However, in some cases, getting funded may take six months or longer.

What Documents Are Needed For An SBA 504 Loan?

You will be required to include supporting documentation with your loan application, including:

• Personal financial statements for every owner with at least a 20% stake in the business
• Prior year federal tax returns for every owner
• Business federal income tax returns
• Balance sheets
• Income statements
• Schedule of debts
• Monthly cash flow analysis (for new businesses)
• Documents showing project costs, including estimates and quotes
• Independent appraisals for real estate projects
• A letter of intent from the private lender
• Credit reports for all owners

Additional documentation may be required. Your CDC will be able to help you determine what documents are needed to complete your application.

The Bottom Line On SBA CDC/504 Loans

The SBA 504 Loan Program is a great option for small businesses in need of cash for fixed assets, expansion, or modernization. If you need fixed interest rates, long terms, and a smaller down payment, this might be the right funding option for your business. 

If 504 loans aren’t quite what you’re looking for, consider the other types of SBA loans that may be a better fit for the specific needs of your business.