What is an SBA 504 loan?

Small Business Administration (SBA) loans are typically more attractive to small business owners compared to other conventional financing options due to their low interest rates and long repayment terms.

Who and What? A Brief Review of the SBA 504 Loan

An SBA 504 loan or 504 business loan offers long-term financing of up to 25 years for major fixed assets such as real estate and machinery. Projects typically qualify for up to $5 million under the SBA 504 loan program but eligible energy-efficient or manufacturing projects can qualify for more than one loan of up to $5.5 million per project.

Low, below-market interest rates are fixed for the entire duration of the loan. Loans are payable in terms of 10, 20, and 25 years. As for the equity, a low down payment (usually 10%) is required from the borrower to preserve his or her working capital.

SBA 504 loan funding is available through Certified Development Companies (CDCs), such as BFC.

CDCs are certified and regulated by the SBA. They are non-profit corporations that promote economic development within their communities through SBA 504 loans. When a lender successfully receives an SBA 504 loan, 50% of it comes from the participating lender (such as a bank) and 40% comes from a CDC.

This amount is fully funded by the SBA, as SBA 504 loans can only be applied and granted exclusively through CDCs.

Who can qualify for an SBA 504 loan?

Borrowers seeking an SBA 504 loan need to meet general SBA loan eligibility requirements, as well as certain criteria that relate specifically to the 504 loan. According to the SBA, general eligibility standards for an SBA 504 loan application include:

  • Falling within SBA size guidelines
  • Qualified management expertise
  • Feasible business plan
  • Good character
  • Ability to repay the loan

Furthermore, loans cannot be granted to businesses engaged in ‘nonprofit, passive, or speculative activities,’ as per the SBA.

What are the SBA 504 loan requirements?

Additional 504 loan requirements are:

  • Your business must be a for-profit business. Operations must also be in the United States. Non-profits will not qualify*.
  • Your business must have a net worth of less than $15 million.
  • Your net income should be less than $5 million for two years before your application.

General SBA loan requirements include:

  • Your business must fall within the category of ‘small business,’ according to the definition of the SBA.
  • Your business must not hold any bad records on government loans, which includes federal student loans.
  • Your personal credit plays a part.

*The following are not eligible for an SBA 504 loan: nonprofit organizations, religious institutions, private clubs, life insurance companies, and businesses that engage in legal gambling, lending, and lobbying.

What types of business expenditures can an SBA 504 loan be used for?

The 504 Loan Program can be used to purchase fixed assets or upgrade existing facilities. The SBA specifies these as assets that ‘promote business growth and job creation.’

Examples of these are:

  • Purchase of a new building
  • Purchase of long-term machinery
  • Purchase of long-term equipment
  • Upgrading or renovating facilities and utilities
  • Upgrading or renovating streets and parking lots

Because it is not a general term loan, a 504 loan cannot be used for the following purposes:

  • As working capital
  • Inventory purchases
  • For repaying or refinancing debt
  • Rental real estate investments

Is it difficult to have an SBA 504 loan application approved?

Because the SBA 504 loan is specifically designed to help small businesses expand, the straightforward answer is no, it’s not difficult to have an SBA 504 loan application approved.

Most for-profit businesses can easily qualify for the 504 loan’s requirements and are eligible for funding. The SBA itself considers the 504 loan as a better option for businesses that typically do not qualify for conventional financing.

If you’re an entrepreneur or a small business owner seeking any further information regarding the programs as mentioned above or have any questions about SBA loans, we request you to kindly contact us or call us at 1-800-SBA-REAL (722-7325)