Small Business Administration (SBA) 504 loan is a wondrous small business loan opportunity for small businesses to gain the financial support they need to acquire working capital. Small businesses can borrow up to 90% of a project cost to purchase commercial assets such as the following:

  1. Existing buildings or land (real estate)
  2. New facilities
  3. Long-term machinery and equipment

Alternatively, a small business can use the loan to improve or modernize:

  1. Land, streets, utilities, parking lots and landscaping
  2. Existing facilities

Soft costs such as the following can be rolled into the loan:

  1. Architectural and legal fees
  2. Environmental studies
  3. Appraisals
  4. Interest and fees on the construction
  5. Interim bank financing

When a small business applies for a SBA 504 loan to acquire commercial real estate or make commercial purchases related to real estate, a small business goes through the following steps:

1. Determine its eligibility.
For a small business to qualify for a SBA 504 loan, the business must meet the following requirements:

  • Operate as a for-profit company in the United States or its possessions
  • Have a tangible net worth of less than $15 million
  • Have an average net income of less than $5 million after federal income taxes for the two years preceding your application
2. Determine the use of the loan.
A SBA 504 loan must be used for commercial purposes such as purchasing commercial real estate or equipment. The loan can’t be used for acquiring inventory, consolidating, repaying or refinancing debt, or speculating or investing in rental real estate.
3. Apply for a SBA 504 loan through Certified Development Companies (CDCs) such as Business Finance Capital.
SBA 504 loans are available exclusively through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.
4. A CDC finds a lending partner such as a bank to loan up to 50% of the project cost.
For example, if your real estate project is $1M, a lending partner such as Banc of California or Bank of America will loan up to $500,000. This part of the loan (50% of the loan) is called the debenture. The maximum SBA debenture can be up to $2 million. Certain manufacturing entities are eligible for up to a $4 million debenture. This means that a CDC can work with you to put together financing for a $10 million project with the bank providing a $5 million first mortgage with a SBA 504 debenture of $4 million, and only 10 percent equity. Each debenture is backed up by the SBA for up to 85% of the loan value.
5. A CDC provides SBA-guaranteed 504 SBA loan for up to 40% of the total project cost, or a maximum of $5 million ($5.5 million for manufacturing businesses and “green” buildings).
In addition, the CDC coordinates and structures the financing package between the parties. For example, a CDC can set up the interest and the term period to 10, 20 or 25 year terms.
6. The borrower or the small business owner puts down 10% of the total project with personal guarantees.
Personal guarantees mean that if the borrower who owns 20% or more of the business applying for the loan, the lender is authorized to seize any of the borrower’s personal assets to repay the loan, if the borrower defaults on the payment or the small business’ assets aren’t sufficient to cover loan payments. SBA 504 loans offer competitive rates compared to rates offered directly from banks and the payment terms can be as long as 25 years so your monthly payments are minimal and in correspondence with your financial stance. These approaches heightens your ability to repay your loans successfully each month.


Key benefits of SBA 504 loan for real estate