What is the SBA 504 Loan Program?
Businesses looking for funding options for mid-sized to large real estate and land projects can find what they need in the SBA 504 loan program.
Businesses looking for funding options for large real estate and land projects might find what they need in the SBA 504 loan program. The SBA created the 504/CDC loan program to enable businesses to complete projects much larger than they could accomplish with other loans.
Certified Development Companies (CDCs) offer the SBA 504 loan program to businesses that meet eligibility requirements. There are more than 260 CDCs across the United States, with local CDC offices in nearly every major city.
Common Uses of SBA 504 Financing
Business owners most often use the SBA 504 loan to fund large land and real estate projects. The 504 loan is usually paired with a loan from a traditional lender, with the costs split between the two. This structure is quite the win-win-win situation: it alleviates the burden on both the SBA and the lender, all while empowering businesses looking to complete projects up to $10 million.
Here’s a look at some of the things you can use an SBA 504 loan for:
Purchase a Building
If your business is expanding into a new location, the funds from the SBA 504 can help. Any costs associated with the buying an existing building can be covered by the SBA 504 loan.
Acquire or Improve Land
You can purchase land with the SBA 504, and make certain improvements specified by the SBA, such as street improvements, parking lots, landscaping, and utilities.
Renovations that modernize existing buildings are included in new construction, as is everything typically associated with new construction. Elevators, fire systems, security, bay doors, and any special requirements for your businesses physical location can be included in the SBA 504 loan terms.
Note: A business owner can’t use the funds from the 504 loan for working capital, unlike some other SBA loans, which puts some limitations on the loan’s versatility.
SBA 504 Loan Structure and Limits
If you’re thinking about the SBA 504 versus the 7(a) loan, the 504 is typically used for larger projects. Where the 7(a) has no minimum loan amount, the 504 has a minimum of $125,000.
Although SBA 504 loans technically have no maximum, the CDC portion of the loan caps out at $5 million, generally speaking. The first-lien component of the loan, usually from a bank, can extend significantly beyond this.
Land and real estate projects benefit from the fixed interest rate of the 504 loan. Also, the SBA sets a fixed down payment requirement of 10%, which makes the borrower contribution to a project’s cost clear. The term you can expect for land and real estate loans is up to 25 years.
What Is a Certified Development Company?
Non-profit organizations that meet SBA criteria can apply to become Certified Development Companies (CDCs) that promote economic development in the regions they serve. The SBA certifies and regulates CDCs nationwide, and over 260 CDCs operate in the United States.
Each CDC offers the SBA 504 loan to companies that meet the eligibility requirements. Local banks and other traditional lenders work with CDCs to fulfill terms of SBA 504 loans, which greatly increases the size of projects funded by the SBA 504.
Each CDC must have a board of voting directors with at least nine members, but no more than 25. The SBA may approve certain companies with fewer voting directors — in fact, much of the approval process is at the discretion of the SBA. Because of the responsibility a CDC carries, the SBA regulates them closely: how they operate, when they are audited, and what they do with any funds generated from SBA 504 loans.
The SBA 504 vs. the 7(a) Loan
The differences between the SBA 7(a) and the SBA 504 loans are primarily in how they're used. For example, the 7(a) allows you to use the funds from the loan for working capital, which you can't do with the 504. The 504 is larger, and has terms that are better suited to land and real estate projects that are large enough to be handled by multiple lenders.
The 7(a) favors start-ups and small business owners looking to work with a bank, credit union, or other traditional lending institution. Eligibility requirements for the 7(a) are straightforward, and are designed to encourage lenders to approve small business owners for projects small and large.
There is no minimum loan amount for the SBA 7(a), and the loan can be used for nearly any legitimate business purpose. Some of the terms of the SBA 7(a) are based on the amount of the loan, but banks generally ask for a 10% down payment from the borrower. Business owners looking to obtain a 7(a) loan must operate within the United States, or a U.S. Territory.
Get Help With Your SBA Loan Process
We understand that the SBA loan process can be confusing — and the SBA 504 loan is more complicated than most.
There’s a lot of information out there, and a lot of it is outdated or doesn’t apply to you or your business. We’re here to help you with your SBA loan process, and we want to get you the expert advice you need to find the right lender.
Take 3 minutes and complete the form below, and we'll be in touch to discuss the best options for your small business's big plans.
What are the benefits of the SBA 504 Loan Program?
The SBA 504 Loan Program offers many benefits to small business owners, including:
- Low interest rates - SBA 504 loans typically have lower interest rates than 7(a) loans and express loans.
- Long-term financing - Terms for SBA 504 financing are typically 10, 15, or 20 years.
- Lower down payment requirements - SBA 504 loans typically have lower down payment requirements than 7(a) loans and express loans.
- No balloon payment - SBA 504 financing is long term and fully amortized without a balloon payment.
For more information, please visit https://sba504.loans/sba-504-blog/sba-504-pros-and-cons.
What types of businesses are eligible for the SBA 504 Loan Program?
Businesses must be for-profit enterprises to be eligible for the SBA 504 Loan Program. Additionally, businesses must not be above a certain size, and cannot be in engaged or involved in certain industries, such as lending money, gambling, speculation, or illegal activities.
To help clarify things, here is a quick and easy list to help you determine if your business qualifies for the program:
- Your business must be a for-profit organization.
- Your business must meet current SBA size standards.
- Your business’ net worth cannot exceed $15 million.
- Your business cannot earn 1/3 or more of its income from packaging SBA loans.
- Your business must earn an average of $5 million or less per year (after taxes, and only for the preceding two years)
- Your business cannot be engaged in any sort of passive or speculative activities
What are the requirements for the SBA 504 Loan Program?
The SBA 504 Loan Program has requirements for borrowers, projects, lenders, and more. For borrowers, the requirements are that the business must be worth $15 million or less, must operate as a for-profit entity, must meet SBA size requirements, must have an average net income of $5 million or less after taxes, cannot be engaged in passive activities, cannot be engaged in speculative activities, must meet job creation requirements, cannot purchase and hold real estate, cannot be engaged in any form of lending, cannot have defaulted on a federal loan previously, cannot be involved in any form of political activity or lobbying activity, cannot be involved in any form of gambling, must be repayable from cash flow generated by the project, must provide personal histories for all principals in the company, must have a business plan, and must plan to occupy at least 51% of the building if it is an existing structure, and 61% of the building if it is new construction. For lenders, the requirements are that they must meet minimum lending activity level requirements, have a board of directors with at least nine directors who vote, have full-time, professional management, have full-time, professional staff, be an SBA-approved private sector lender, and work with CDCs.
How long does it take to get approved for the SBA 504 Loan Program?
The length of time required for an SBA 504 loan to be approved can vary drastically, but averages between 60 and 90 days. With that being said, it may take up to six months in some situations. There is no hard and fast rule here, and each situation will be unique.
Factors that go into determining the length of time to loan approval include:
- Your ability to gather all required information
- Your ability to satisfy all lender requirements for information and proof of income
- SBA approval (up to 7 days)
- Due diligence (2 to 3 weeks)
- Closing (up to 14 days)
We’re here to help you get the commercial financing you need. Simply fill out the form below for a risk-free consultation and a free SBA loan quote!
What are the interest rates for the SBA 504 Loan Program?
The interest rates for the SBA 504 Loan Program range from 4.0% - 5.0% and the term is 10 - 25 years.