Program Overview

The SBA 504 loan is a unique program designed to assist small business owners obtain long-term financing for capital assets like the purchase of real estate and expensive equipment, while promoting business growth, and job creation.

SBA 504 loans are made through both a participating lender and a Certified Development Company (CDC).  A CDC is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.

There are many CDCs nationwide, some of which are restricted to a specific geographic area but usually within State borders.

There is no limit to the total project cost but one job must be created or retained for every $65,000 of SBA 504 loan proceeds or every $100,000 for manufacturing companies.  The total cap for the SBA 504 portion is $5,000,000.

Generally, the project assets being financed are used as collateral. Personal guaranties from owners of 20% or more are also required.

Eligible projects include for-profit corporations, partnerships or sole proprietorship; industrial, commercial or service businesses; tangible net worth not in excess of $15 million; less than $5 million average net profit after taxes during previous two years.

Eligible uses of funds allow the purchase major fixed assets such as land, buildings, improvements, long term equipment, construction and renovation and soft costs such as architect and engineering fees, interim interest, environmental studies, equipment setup and delivery, and certain legal fees related to the loan.

Ineligible uses of funds are for working capital, accounts receivable, inventory, debt refinancing, franchise fees and vehicles.

Interest rates on SBA 504 Loans are correlated with the current market rate for 5-year and 10-year U.S. Treasury issues. Loan maturities of 10 and 20 years are available. Fees may be financed with the loan and typically vary between 2.5 – 3.5% of the SBA 504 loan amount (not the total financing).

How It Works

The SBA 504 loan program is unique in that it is a partnership between a Certified Development Company, the Small Business Administration (SBA), and a lender (typically a bank).

The CDC provides a maximum of 40% financing of an eligible project with a dollar cap of $5,000,000. A lending institution selected by the applicant finances 50% of the project and takes first position on the equity which leaves the applicant to come up with the remaining ten percent.

The CDC works with a borrower to process, approve, close, and service the SBA 504 loan which is a lot more convenient than the 7(a) loan as the CDC does a majority of the paperwork.  Funding is provided by the CDC through the issuance of a debenture bond that in turn is sold to investors on Wall Street which is attractive to investors since they are backed by the SBA and fully guaranteed by the U.S. Treasury.

Case Study

We worked with a motorcycle aftermarket parts manufacturer that had been leasing his manufacturing facility and had recently went through an expensive expansion from purchasing a competitor.  The landlord wanted to sell this property and while he wanted to sell to our client since they had a great relationship, another local manufacturing company had indicated interest in purchasing (and had the funds to do so), the landlord had immediate financial needs due to his health.

We eventually structured a deal between a CDC, community bank and a revolving loan fund to acquire the building.  This project was a challenge due to the clients lack of available collateral and debt levels but the 504 and local revolving loan program were able to accomplish their mission of improving local economies and potentially saved this manufacturer from leaving the community to find another building.

Why Get a SBA 504 Loan?

The purpose of a SBA 504 loan is to provide financing for small businesses that are unable to obtain conventional financing.  The 504 program allows for a low down payment at great interest rates and is usually best suited for real estate or large equipment purchases.

While the 504 can be used for a start-up you are usually better off going with the SBA 7(a) loan program if you have to get a loan guarantee.

Where To Find

While the process needs to begin with your local lender, a list of CDC’s can be found through this link –