SBA 504 Loan – What is it?

What is an SBA 504 loan?

As SBA remains true to its promise of giving essential financial opportunities to small business owners, the agency also welcomes borrowers for financing significant assets. If you’re familiar with SBA’s 7(a) program, you might already know that it’s made for people who primarily want to have a working capital or inventory. Now, SBA’s 504 loans have a better choice for small business owners who need assistance with financing for significant assets such as real estate or equipment.

What is the SBA 504 Loan Program?

504 Loan Program is for businesses that need long-term, fixed-rate financing for major assets like equipment and real estate. The loans under this program are typically structured with the SBA protocol.  As of February 15, 2012, 504 loans made way for the creation of over 2 million jobs.  These numbers prove that the program is a success and offers a win-win-win for the small business, participating lenders and the community.

What is the SBA 504 Loan Structure?

The dynamics in 504 loan involve 40 percent of the total project costs from SBA and a 50 percent from the participating lender. The remaining 10 percent will come from the borrower.

How 504 Loan Funds May Be Used?

Borrowers can use the funds from a 504 loan to purchase existing buildings, land, or long-term machinery. The money can also go to the construction or renovation of facilities. Refinancing debt to help expand the business is also a good idea. Please note that 504 loans cannot be used for working capital or inventory. Borrowers can obtain a maximum amount of $5.5 million per loan. These loans can be available with 10 or 20-year maturity terms.

How does SBA provide 504 loans?

504 loans are made available through the help of Certified Development Companies (CDCs). CDCs are SBA’s community-based partners for providing 504 Loans.  A Certified Development Company or also known as CDC is a non-profit corporation. It aims to promote economic development within its community. 504 Loans is its way of pursuing its goal. About 260 CDCs are there nationwide.  Each of them has a defined Area of Operations that cover a specific geographic area.

What are the SBA 504 Loan Benefits for the small business owner?

The primary benefits of 504 loan benefits include the following:

  • 90% financing
  • Longer loan amortizations and no balloon payments
  • Favorable fixed-rate interest rates
  • Savings that can result in improved cash flow

What does it take to have 504 Loan Eligibility?

For a small business owner to be eligible for a 504 loan, the business must be operated for profit. It should also fall within the size standards set by the SBA. Under the 504 Program, a company can qualify for a loan if its net worth doesn’t exceed $15 million. The average net income should be $5 million or less after federal income taxes for the preceding two years before application. To learn more about the requirements for an SBA loan please read our article here.  Furthermore, there will likely be a life insurance requirement for an SBA 504 loan.

To know more about loan eligibility under 504 programs, all small business and lenders can contact a Certified Development Company in their area.