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SBA 504 Loans: Who Qualifies & How to Apply

SBA 504 Loans: Who Qualifies & How to Apply
Lauren Ward
Lauren WardUpdated May 11, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
SBA 504 loans help businesses grow and create jobs with up to $5 million in low-interest financing. Instead of applying through the Small Business Administration (SBA) or a private lender, for a SBA 504 a borrower must work with Certified Development Companies (CDCs) for approval and funding. CDCs provide part of the funding through SBA funds, with another portion provided by banks, and a small slice provided by the business itself. SBA 504 Loan Funding Breakdown:
FunderExisting BusinessStart-up or Special Purpose FacilityStart-up and Special Purpose Facility
CDC/SBA Funds0.40.350.3
Private Lender0.50.50.5

What Is an SBA 504 Loan?

An SBA 504 loan is designed to provide businesses with financing for major fixed assets. The goal is to help fuel both business growth and job growth using long-term financing up to $5 million. This program differs from the popular SBA 7(a) loan option, which lets borrowers use funds for working capital as well. Although SBA 504 loans are structured through the U.S. Small Business Administration (SBA), potential borrowers must apply for funding through Certified Development Companies (CDCs). These are approved lending partners that focus on local economic development. Approved borrowers receive 90% of their financing needs and must provide the remaining 10%. There are three maturity term options for SBA loans: 10 years, 20 years, or 25 years. 

504 Loan Interest Rates

The borrower’s interest rate starts with a base rate, using either the current 5-year or 10-year U.S. Treasury notes market rate. Then an increment above that amount is used to calculate the interest rate for the loanRates are fixed for the life of the loan. They’re typically low compared to other types of business financing. 

What Can an SBA 504 Loan Be Used For?

The SBA outlines specific categories that 504 loan funds can be used for, as well as items that can’t be paid for using these funds. Eligible assets you can purchase with these funds must be aimed to create job growth. This could include purchasing or constructing buildings, land, new facilities, machinery, or equipment.The funds may also be used to improve or modernize land, streets, parking lots, landscaping, and utilities. Prohibited expenses include working capital, inventory, debt consolidation, and rental real estate. In order to finance some of these categories, you might instead consider financing from the SBA or conventional small business loans

SBA 504 Eligibility Requirements

SBA 504 loans are available to for-profit companies that have a tangible net worth of under $15 million. Additionally, the average net income must have been under $5 million (post-federal taxes) for the preview two tax years. Applicants must also not have other resources available to them. Lenders review both the business’s assets and the owner’s personal assets, which may reduce the approved loan amount if they’re too high. The company’s cash flow and projected cash flow are also evaluated to ensure that it can afford to repay the loan. A personal guarantee is also required.

What Is a CDC Lender?

A certified development company (CDC) is a non-profit organization focused on economic development in its local community. CDCs must be certified by the SBA and are regulated by the SBA as well. CDCs review and approve applicants for the 504 loan program. Once a loan is approved, the CDC funds 40% of the loan amount through SBA funds, then sells 50% of the loan amount to a bank or other financial institution. The business must provide the remaining 10% of the funds.CDCs are the only organizations certified to offer 504 loans. In order to apply for this type of financing, companies must find a local CDC through the SBA. 

Pros and Cons of an SBA 504 Loan

504 Loan Cons504 Loan Pros
Restricted use of fundsCompetitive interest rates
Job growth requirementsLarge loan maximum

Pros of 504 Loans

504 loans come with several distinct benefits:
  • Low, fixed interest rate
  • Large maximum loan amounts compared with other funding that’s typically available
  • Low 10% down payment
In short, this can be an extremely affordable form of financing for small businesses ready to make major purchases or improvements. 

Cons of 504 Loans

Of course, there are downsides to consider as well:
  • Restricted use of funds
  • The project you’re financing must lead to business and job growth in the community
  • A personal guarantee is also required in addition to a 10% down payment. This is your binding promise that if the business can’t pay back the loan, you will personally be responsible.
Depending on your project, it may be worth comparing the SBA 504 vs. 7(a) loan programs to find the best small business loan option for you and your funding needs. Recommended: What Is the SBA Guarantee Fee?

How to Apply for an SBA 504 Loan

Applicants submit their applications directly through a local CDC. In addition to providing company and personal financials, you’ll also need to submit a “Statement of Personal History” to confirm the good character of all company principals. It looks at their past history of repaying debt as well as any legal history. You must also show a business plan that outlines the projected costs you expect to incur. The CDC you work with will give you a specific list of required documentation. Be aware that the loan approval process can be long. Many CDC lenders estimate it takes an average of one to three months before approved applicants will receive funding. 

Alternatives to an SBA 504 Loan

There are many other options to consider instead of an SBA 504 loan depending on what exactly your needs are.
  • SBA 7(a) Loan: Funds can be used more broadly with an SBA 7(a) loan, including for working capital and inventory. 
  • Online Small Business Loan: You can apply for a small business loan online. Rates are typically higher, but the application process is usually faster.  
  • SBA Express Loan: For smaller loan amounts that can offer a fast turnaround time, you could also consider an SBA express loan. These provide up to $350,000.
  • Equipment Financing: Private lenders offer equipment financing to purchase assets. These loans are typically secured by the equipment itself. However, some lenders may also require a personal guarantee. 

The Takeaway

There are many different types of small business loans. The best financing option for your small business depends on your company’s finances, funding needs, and business structure. Whether you choose an SBA 504 loan or another type of financing, be sure to compare multiple options. Lantern by SoFi can help you to explore with its online marketplace.

Frequently Asked Questions

Am I eligible for an SBA 504 loan?
How can I use the SBA 504 loan?
What is a CDC lender?
What are the pros and cons of an SBA 504 loan?
Photo credit: iStock/AnnaStills

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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