What Is an SBA 504 Loan?

The short answer

An SBA 504 loan is long-term, fixed-rate financing for major fixed assets — buildings, land and long-life equipment. It's made through a Certified Development Company (CDC), a nonprofit authorized and regulated by the SBA, working together with a senior lender such as a bank. The SBA lists the maximum 504 loan amount as $5.5 million, and 10-, 20- and 25-year terms are available. Owners use 504 loans to buy or build the building they operate in instead of renting.

How a 504 project is structured

A 504 project usually has three pieces. The common structure is a first loan from a senior lender, a second loan from the CDC (backed by an SBA-guaranteed debenture), and the owner's equity. A widely used split is 50% / 40% / 10%; startups and special-purpose properties often require more equity. Exact percentages come from the SBA's operating procedures and the lender.

What a 504 loan can finance

According to the SBA, 504 loans can be used for:

• Buying, constructing or renovating buildings or land
• Long-term machinery and equipment with a remaining useful life of at least 10 years
• Refinancing or consolidating qualified debt under the conditions in 13 CFR 120.882

What it can't finance

• Working capital or inventory
• Debt that doesn't meet the SBA's definition of qualified debt
• Speculation or investment in rental real estate — the business generally must occupy the property

Eligibility basics

The SBA says a 504 borrower must be an operating, for-profit business located in the U.S., small under SBA size standards and not an ineligible business type. Other standards include qualified management, a feasible business plan, good character and the ability to repay. 504 loans also carry job-creation or public-policy goals that the CDC will review.

Rates and fees

The CDC portion's rate is pegged to an increment above the current market rate for 10-year U.S. Treasury issues and is fixed for the term. The SBA notes that fees total roughly 3% of the debt and may be financed with the loan. The senior lender's portion has its own rate and terms, which may be fixed or variable.

Worked example (hypothetical)

• Project: buy a $2,000,000 building for your business
• Senior lender (50%): $1,000,000 at 7.5% over 25 years ≈ $7,390 a month
• CDC/SBA loan (40%): $800,000 at 6.5% fixed over 25 years ≈ $5,402 a month
• Owner equity (10%): $200,000 cash at closing
• Combined payment ≈ $12,792 a month, or ≈ $153,500 a year
• Compare: current rent of $14,000 a month — similar cash outlay, but you build equity
• Check DSCR: business cash flow of $230,000 ÷ $153,500 ≈ 1.50x

504 vs. 7(a) for real estate

Both programs can finance owner-occupied real estate. A 504 loan often suits large real estate or long-life equipment projects where a fixed rate on a big portion of the debt and a lower equity requirement matter. A 7(a) loan is more flexible: it can combine real estate with working capital, inventory or a business purchase in one loan. Many acquisitions that include a building use a 7(a) loan for the business and sometimes a 504 loan for the property — run both payments to see what your cash flow supports.

How to start a 504 project

• Get a realistic project budget: price, renovations, closing costs and equipment
• Estimate both loan payments and your combined DSCR
• Confirm the business will occupy the property as the SBA requires
• Talk with a CDC (the SBA lists them by state) and a senior lender, or work with a financing specialist to prepare the package

Questions to ask a CDC and senior lender

Because a 504 loan involves two lenders, ask both the same questions so you can compare the full picture rather than one piece of it.

• What equity percentage will you require for my business and property type?
• What will the senior loan's rate, term and reset schedule be?
• What are total fees on each portion, and which can be financed?
• Are there prepayment penalties on either loan?
• What third-party reports are needed, and who orders them?
• How long do you typically take from application to closing on a project like mine?

Common questions

Sources

• SBA: 504 loans — uses, terms and eligibility
• SBA: SOP 50 10 — Lender and Development Company Loan Programs
• SBA: Size standards
• eCFR: 13 CFR 120.110 — ineligible businesses