permanent loans

SBA 504 Loans

The Key to Unlocking Your Small Business Growth Potential

Are you a small business owner with dreams of expansion? Perhaps you want to purchase a new building for your operations, invest in top-of-the-line machinery, or even refinance existing debt? The SBA 504 loan program could be the solution you’ve been looking for. This powerful financing tool, offered through the U.S. Small Business Administration, is designed to help small businesses achieve their growth goals.

In this in-depth blog post, we’ll dive into everything you need to know about SBA 504 loans. We’ll cover what they are, how they work, the benefits, eligibility requirements, the application process, and some important considerations to keep in mind.

What is an SBA 504 Loan?

The SBA 504 loan program is a long-term, fixed-rate financing option for small businesses that want to acquire major fixed assets and support job creation. It’s a unique partnership between:

  • Certified Development Companies (CDCs): Nonprofit organizations regulated by the SBA that work with small businesses on the local level.
  • Third-party lenders (typically banks): They provide a portion of the financing.
  • The Small Business Administration (SBA): The SBA guarantees a portion of the loan, reducing risk for the lender.

How SBA 504 Loans Work

An SBA 504 loan offers a structured financing model:

  • Conventional Lender (50%): A traditional bank typically provides 50% of the total project cost as a first mortgage.
  • SBA-Backed Portion (40%): The CDC facilitates a second mortgage for up to 40% of the project cost, backed by the SBA guarantee.
  • Borrower Contribution (10%): The small business owner provides a down payment of at least 10%. (This amount may increase under certain conditions)

Example

Let’s say you want to purchase a $1 million commercial building. With an SBA 504 loan, the financing could look like this:

  • Bank loan: $500,000
  • SBA-backed loan: $400,000
  • Your down payment: $100,000

Benefits of SBA 504 Loans

SBA 504 loans have become increasingly popular among small businesses for several compelling reasons:

  • Lower down payments: The 10% down payment requirement is significantly lower than many conventional commercial loans.
  • Long repayment terms: Terms of 10, 20, or even 25 years help spread out payments, easing cash flow.
  • Fixed interest rates: You’re protected from interest rate fluctuations, allowing for more predictable budgeting.
  • No balloon payments: Repayment is fully amortized.
  • Job creation benefits: The program is tied to stimulating the economy and job creation.

Eligible Uses of SBA 504 Loans

 

To ensure the program supports tangible growth, funds from SBA 504 loans must be used for specific purposes including:

  • Purchasing land or existing buildings
  • Constructing new facilities
  • Renovating or improving existing facilities
  • Purchasing long-term machinery and equipment (must have a useful life of at least 10 years)
  • Refinancing eligible debt (under specific conditions)

Eligibility Requirements for SBA 504 Loans

To qualify for an SBA 504 loan, your business must meet these general guidelines:

  • Operate as a for-profit business in the United States
  • Fall within the SBA size standards (These vary depending on your industry – your CDC can help you determine this)
  • Have a tangible net worth of less than $15 million
  • Average net income (after taxes) of less than $5 million for the two years prior to your application
  • Demonstrate the ability to repay the loan
  • Intend to create or retain jobs
  • Not be engaged in ineligible activities (such as lending, passive investment, gambling, etc.)

Ineligible Uses:

SBA 504 loans can’t be used for:

  • Working capital or inventory
  • Investment in rental real estate
  • Speculative businesses
  • Repaying delinquent taxes