What Actually is an SBA 504 Loan Debenture?

U.S. Small Business Administration (SBA) 504 loans or SBA 504 loans are designed to assist small businesses by offering competitive commercial loans that have low interest rates. Small businesses can use the loans to acquire commercial assets such as offices, machinery, furniture, real estate, machinery, equipment, construction or type of fixed assets to operate their companies. 

In order for us to understand what an SBA 504 loan debenture is, we must first understand the fundamental structure of an SBA loan. Here’s how a SBA 504 loan works.

SBA 504 Loan

How SBA 504 Loans Work

Certified Development Companies (CDC) such as Business Financial Capital (BFC) partner with financial lenders to provide up to 90 percent financing to businesses for purchasing owner-occupied commercial real estate and equipment. Within the 90 percent of the loan, a CDC such as Business Financial Capital provides up to 40-percent of the financing and the lender such as a bank provides the remaining 50 percent of the loan. Business owners pay as little as 10 percent.

A CDC doesn’t lend money directly to small business owners. Instead, a CDC sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. Loans made by lenders are guaranteed by the U.S. SBA for up to 85% of the loan. For example, if a borrower defaults on a SBA 504 payment, SBA will pay back 85% of the loan to the lender. This guarantee tremendously reduces lenders’ risks.

This minimization of risks also allows lenders to consider loaning money to small businesses that lenders may otherwise not take under consideration due to the small businesses’ credit scores, revenues, company sizes, or other factors.

SBA 504 loan conditions are set within parameters specified by the SBA. This means that interest rates and terms have been standardized across all financial institutions. This standardization allows borrowers to receive competitive interest rates from all lenders while preventing any fraudulent or interest rate-gauging activities.

SBA 504 loans are an incredible ally to small businesses because the loans give small businesses the financial fuel small businesses need to operate or scale their companies without having to pay hefty interest rates on their payments!

What’s SBA 504 Loan Debenture?

SBA 504 Loan Pie Chart

When a small business applies for a SBA 504 loan through a CDC, the CDC passes the application to SBA for approval. Once the application is approved, 50% of the loan is sold to a lender such as a bank, credit union, or private lender. This portion of the loan (50% of the total loan) is called the debenture. As mentioned above, each debenture is backed up by the SBA for up to 85% of the loan value. This security makes debentures low-risk and safe for lenders.

Information about Debenture

Maximum debenture amount

While there is no maximum project size, the maximum SBA loan amount (debenture) is $5 million. Small manufacturers or specific types of energy projects (as described in the energy project section) may qualify for a $5.5 million debenture. Generally, a business must create or retain one job for every $65,000 guaranteed by the SBA. Small manufacturers must create or retain a ratio of one job for every $100,000. As an alternative to job creation or retention, your business may qualify if it meets a community development or public policy goal as long as the CDC maintains its portfolio job average requirements. 

Debenture maximum percentage

40% of the project, subject to the limitation of the debenture amount.

Borrower’s equity requirement

Minimum 10%

Use of proceeds

The use of proceeds from SBA 504 Loans must be used for fixed assets (and certain soft costs), including:

  • The purchase of existing buildings
  • The purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping
  • The construction of new facilities or modernizing, renovating or converting existing facilities
  • The purchase of long-term machinery or the refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment

Interest rates

The loan rate varies depending on the current market rate at time of funding.

SBA 504 Loan Eligibility

To be eligible for a SBA 504 Loan, your business must be operated for profit and fall within the size standards set by the SBA. Under the SBA 504 Program, a small business qualifies for a SBA 504 loan if it has a tangible net worth not more than $15 million, and an average net income of $5 million or less after federal income taxes for the preceding two years prior to application.

Loans can’t be made to businesses engaged in nonprofit, passive or speculative activities. For additional information on eligibility criteria and loan application requirements, please contact us and we’ll be happy to answer your questions!

Summary of 504 SBA Loan Benefits for Small Businesses

The SBA 504 Loan program offers small businesses both immediate and long-term benefits so business owners can focus on growing their business and cultivate bright possibilities for their future. Some of the top-level benefits include:

  • 90% financing
  • Longer loan amortizations, no balloon payments
  • Fixed-rate interest rates
  • Savings that result in improved cash flow for small businesses

Business Financial Capital is Southern California’s leading SBA 504 loan Program expert, with over 20 years in the industry. We help California businesses grow by facilitating the premier tool for Real Estate financing—the SBA 504 loan.

Have questions about SBA 504 loans or want to apply for a SBA 504 loan? Call us a 1-800-SBA-REAL (722-7325) or submit a contact form and it’ll be our pleasure to help!