SBA 504 loans: How to qualify and apply

While many SBA loans can be used for general purposes, the SBA 504 loan is designed specifically for assets like commercial equipment or real estate. Need a piece of equipment to get work done quickly or expand your business? The 504 loan may help if you don’t qualify for conventional business loans. You get long repayment terms, competitive borrowing costs, and you’ll work closely with a Certified Development Company that specializes in these types of loans.

In 2023 so far, the SBA has approved 4,239 SBA 504 loans for a total of $4.6 billion, according to the SBA 7(a) and 504 Summary Report. That’s not as much as the popular SBA 7(a) loan program, which has approved 38,676 loans for a total of $18.4 billion so far in 2023. But the SBA 504 program can be a better fit for business owners looking to cover the costs of real estate or equipment purchases.

Let’s look at the ins and outs of getting an SBA 504 loan.

What is an SBA 504 loan?

An SBA 504 loan is a long-term business loan designed for buying large assets like commercial equipment and real estate. The program is focused on assets that support the business’s growth or provide additional jobs to employees.

Like all SBA loans, it’s partially guaranteed by the U.S. Small Business Administration, though at a lower rate than other SBA options.

What is a Certified Development Company?

A Certified Development Company (CDC) is an SBA-certified nonprofit partner that supports developing surrounding communities. These community partners are your go-to source for learning about the 504 loan requirements and applying.

How do SBA 504 loans work?

SBA 504 loans can provide up to $5 million in funding to buy fixed assets like real estate. Funding requests for energy efficiency or manufacturing projects may be eligible for up to $5.5 million for multiple loans.

The 504 loan is guaranteed by the SBA for up to 40 percent of the loan amount borrowed. This guarantee is much lower than the 7(a) loan that guarantees up to 85 percent of the loan.

An additional portion of the 504 loan is also guaranteed by a third party, such as a bank or credit union. The third party may guarantee as much as 50 percent of the loan. To round out the collateral requirements, your business will be required to put down at least 10 percent of the loan amount.

SBA 504 loan rates

The 504 loan interest rate is set above the market rate for 10-year U.S. Treasury bonds. It usually totals about 3 percent of the borrowed amount, baked into the loan repayments.

SBA 504 loan fees

The 504 loan program charges a few fees to maintain funding, but the fees can be rolled into the repayments.

SBA 504 loan repayment terms

The SBA dubs repayment terms the maturity date, offering 10-, 20- and 25-year maturities for the 504 program. You may have different repayment terms on the portions guaranteed by the bank versus the Certified Development Company.

SBA 504 down payment

The SBA 504 loan program requires a down payment of at least 10 percent. If you’re a startup business or acquire properties for a special purpose, you may be required to put down more money for the loan.

What can an SBA 504 loan be used for?

You can use this popular 504 loan for assets that support business growth initiatives. These include:

Ineligible expenses

You’ll need to look at loans other than the SBA 504 loan if you’re planning to use the funds for:

• Working capital
• Inventory purchases
• Speculative purchases
• Debt consolidation
• Repaying or refinancing debt
• Rental real estate

SBA 504 requirements

To get an SBA 504 loan, you must meet the SBA’s minimum requirements and requirements from the CDC and lender. Lender requirements will vary but may be competitive because 504 loan borrowing costs and repayment terms are desirable.

SBA 504 loan requirements include:

• Meeting SBA business size guidelines
• Is reasonably able to repay the loan
• For-profit company
• Based in the U.S. or U.S. possessions
• Net worth under $15 million
• Average net income under $5 million, after federal taxes for the past two years
• Not able to qualify for conventional loans

How to apply for an SBA 504 loan

The 504 loan program is offered through CDCs, which are nonprofit organizations certified by the SBA to offer this loan. You can apply in a few steps:

1. Find a CDC through the SBA’s local assistance tool.
2. Contact the CDC directly to start an application.
3. Fill out the application. Key managers and employees and anyone with at least 20 percent ownership in the business will need to apply.
4. Provide financial and business documents.
5. Wait for 30 to 90 days for SBA approval.

Alternatives to SBA 504 loans

You can finance real estate and equipment through business loans other than the 504 loan program. Alternatives that may suit you:

• SBA 7(a) loans. Another popular SBA loan, the 7(a) loan can be used for general purposes, including buying assets. It’s offered through SBA-approved lenders like banks rather than CDCs. The SBA doesn’t require collateral for loans under $25,000, though lenders might.
• SBA Express loans. Express loans work well for small expenses under $500,000 since this is the maximum loan size. Repayment terms range from five to 25 years. It’s also known for faster approvals than the usual SBA loan.
• SBA microloans. Microloans offer funding up to $50,000, usually through a community-based lender that chooses to participate in the microloan program. These lenders usually aim to serve underserved communities, providing education and other support to help small businesses succeed.
• Equipment loans. An equipment loan is a type of business term loan that’s secured by the commercial equipment you’re buying. Like the 504 loan, it may have a lower down payment due to the collateral. Equipment loans often have lenient eligibility requirements, such as requiring annual revenue as low as $100,000.
• Commercial real estate loans. A commercial real estate loan is like a mortgage for your business, except that the lender considers your business income or revenue that the property will bring in when approving the loan.

Bottom line

The SBA 504 loan works well if you want to grow your business by buying assets. You get the benefit of much longer repayment terms than conventional business loans. You also work one-on-one with a Certified Development Company (CDC), a nonprofit specializing in offering these types of loans.

But you’re limited in what you can use this loan for, and you have to meet the SBA’s and lender’s requirements to qualify. On top of that, SBA loans are known for their slow approval process, while other lenders offer fast funding in as little as a few days.

You may want to check out other loan options if you don’t qualify for the 504 loan.

Frequently asked questions

• Is it hard to get an SBA 504 loan?

  It can be difficult to get approved for an SBA 504 loan because they offer relatively low interest rates and fees and long repayment terms. You also have to meet the SBA’s requirements and any lender criteria because this loan is competitive with small business owners.

• What is the 95% rule for SBA 504?

  Before July 2022, the SBA had a rule that required the 504 loan amount to be at least 95 percent of the asset’s appraised value. The percentage is now revised to just 90 percent. If the appraised value is less than 90 percent, the CDC must either lower the loan amount or ask for more business collateral. If the business cash flow is strong enough, the CDC may approve loans that don’t meet this requirement.

• What are the credit requirements for SBA 504?

  The SBA doesn’t set minimum credit score requirements, but CDCs will determine your creditworthiness to repay the 504 loan. CDCs may look more closely at your revenue, time in business and collateral for this loan.