What is the SBA 504 loan program?

An SBA 504 loan, sometimes called The CDC/504 Loan Program is a US government guaranteed loan that provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation. SBA 504 loans are available 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.

Eligible loan purpose: Purchase of major fixed assets like land, buildings, equipment, and machinery

Loan amount: Up to $5 million on CDC portion, up to $5.5 million for specific businesses

Interest rates: Fixed, typically about 5% to 6% for CDC 2nd; bank rates for 1st can vary

Terms: Up to 25 years

Down payment: 10% of the loan amount

Collateral: Project assets being financed are often used as collateral; personal guarantees for business owners of 20% or more are required

SBA 504 Loan Structure

The borrower will pay 10% of the loan as a down payment. The CDC will put up 40% of the loan’s value. An SBA-approved lender will then supply the remaining 50% of the value.

Example:

Loan Amount: $1,000,000

Borrower provides $100,000 as a down payment

Your CDC supplies $400,000 – This is provided through a second lien, usually with a 20 or 25-year, fixed interest rate.

The bank/lender supplies $500,000 – This is a first lien from a private sector bank/lender.

What can SBA 504 funds be used for?

A 504 loan  can be used for a range of assets that promote business growth and job creation. These include the purchase or construction of:

A 504 loan  cannot  be used for:

Working capital or inventory

Consolidating, repaying or refinancing debt

Speculation or investment in rental real estate

Am I eligible?

• Not for a solely rental purpose project: If you are looking to buy real estate for rental purposes (rental is allowed BUT your business must occupy at 51% of the property) or to “hold” real estate for investment purchases, you will not qualify for an SBA 504 loan.
• Your business must occupy 51% of the building: If you are purchasing commercial real estate, your business must occupy at least 51% of the property you plan to purchase if it’s an existing building, or 61% of the building if it’s new construction.
• For-profit: Your business must be considered “for profit.” Non-profit businesses are not eligible for SBA 504 loans.
• Business must be worth less than $15 million USD. Businesses worth more than $15 million USD are not eligible for the 504 loan program.
• Net income: Your average net business income must be $5 million or less the previous two years before applying.
• Previous defaults. You cannot have previously defaulted on a federal loan, or be engaged in any sort of political, lobbying, lending, or gambling activity. You also cannot be engaged in passive or speculative activities of any kind; examples – businesses involved in land purchase for sale banking on the flip value of the resale to return profits, an investment firm basing its revenues on the investment sales return versus fee for services revenue stream from its clientele.
• Business plan. You must have a feasible business plan to get an SBA 504 loan.
• Cash flow. The project you want to fund must be able to create enough cash flow to repay your loan.

Required SBA Forms