SBA 504 Loans: Eligibility Requirements and How To Apply

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Gaining access to capital often is challenging for small businesses wanting to grow. Traditional lenders like banks hesitate out of concern that the borrower won’t be able to repay the loan, based on a low credit rating or no borrowing history at all.

There’s a loan for that type of business—the SBA 504 loan, which is geared toward business owners who want to finance purchasing or expanding fixed assets, such as buildings or land. Here’s a rundown on this loan program.

What is an SBA 504 loan? 

The Small Business Administration (SBA) 504 loan is a loan of up to $5 million, although the maximum loan amount sometimes is $5.5 million for certain renewable and energy-efficiency projects.

Typically, small businesses seek SBA funding by applying for loans at banks or credit unions that participate in SBA programs. However, small business owners must apply for SBA 504 loans through a certified development company (CDC), which are nonprofit economic development organizations. CDCs certified and regulated by the SBA are located throughout the US—there are more than 200 of them—and their purpose is to foster economic development projects that contribute to job creation and promote business growth. 

SBA 504 loans are issued in partnership with a private lender—typically a bank—and the SBA. A borrower must make a 10% down payment, while 50% of the borrowed amount comes from a bank or credit union. The remaining 40% comes from the SBA 504 loan program through a CDC. The loan is backed by an SBA-guaranteed debenture, which is a type of debt not secured by collateral.

The bank’s financing is offered with a fixed or variable rate, and the business owner and lender can negotiate interest rates, terms, and fees. The CDC’s portion of the loan is at a fixed interest rate. 

SBA 504 loans have maturity lengths of as long as 25 years—10 years for machinery and equipment purchases, and 20 to 25 years to purchase real estate. 

What can SBA 504 loans be used for? 

SBA loans must be used by small business owners to purchase or modernize:

  • Land or existing buildings
  • Newly constructed or existing facilities
  • Long-term machinery or equipment 
  • The improvement or modernization of land, including commercial real estate, streets, utilities, parking lots, and landscaping 

SBA 504 loans cannot be used for working capital or inventory, or to repay debt, including debt refinancing. The loans also can’t be used for passive or speculative investing, meaning you can’t buy real estate and do nothing with it in hopes of selling for a profit.

Is your business eligible for an SBA 504 loan? 

A small business owner must meet a number of eligibility requirements to qualify for a SBA 504 loan. This limits the loans to companies that meet the following criteria:

  • For profit
  • Located in the US or territories
  • Have net worth of less than $15 million
  • Have average net income of less than $5 million after federal income taxes for the two years before applying
  • No access to funding from other sources
  • A small business, per SBA guidelines
  • Have property and hazard insurance
  • Have proof of real estate tax payment
  • Demonstrate management expertise
  • Have good character, meaning a willingness and ability to pay debts and abide by laws
  • Feasible business plan
  • Can repay the loan

Nonprofits are not eligible for SBA 504 loans, nor are life insurance companies, lending clubs, lobbying firms, and any illegal or legal gambling businesses. 

3 steps for applying for an SBA 504 loan

There are three basic steps to take when applying for an SBA 504 loan.

1. Find your local CDC

Find your local CDC by typing in your ZIP code and choose “certified development company” in the appropriate fields on the SBA local assistance page. Large cities have multiple CDCs, but smaller towns and rural areas might only have one within driving distance. 

2. Gather documents and apply

Once you have chosen a CDC to work with, you’ll start the application process by filling out the SBA 504 loan application, and organizing the relevant paperwork and documentation for submission, which includes, in part:

  • Federal income tax returns and personal tax returns for the past three years
  • Business finance statements for three previous years and personal finance statements
  • Your business plan
  • Cost estimates for contractors if your project involves construction

3. Closing 

Once your loan is approved, it generally takes two to three months for the SBA 504 loan to close and for the lender and SBA to disburse the funds. 

What are SBA 504 loan interest rates? 

Interest rates on SBA 504 loans vary depending on the location, bank, type of project, and length of loan maturity, which is 10, 20, and 25 years. In addition, the bank portion and the CDC portion each have their own rules about interest rates. 

The bank portion of the loan’s interest rate is negotiated between the bank and the business owner. The CDC portion of the loan has a fixed interest rate, determined when the SBA sells the debenture that backs the loan to investors.

Rates on SBA 504 loans often are lower than rates on other SBA loans, such as the more common SBA 7(a) loan program. The SBA 7 (a) program has fewer restrictions than the SBA 504, and businesses can use the loan proceeds for working capital and to refinance existing debt, as well as buying equipment, machinery, or supplies.

SBA 504 loan repayment terms

Borrowers make two payments: one each month to the bank and the other to the CDC. Loan repayment terms vary—the CDC portion’s interest rate is fixed, while the bank part is either fixed or variable. Accepted forms of repayment include ACH withdrawals, wire transfers, or checks.

SBA 504 loans FAQ

What fees are associated with an SBA 504 loan?

There is an upfront fee payable to the SBA, usually 2.15% of the loan amount, among a few other processing fees, which typically are folded into the loan principal. Applicants can ask for a list of fees and repayment schedule from the CDC when discussing their SBA 504 loan.

How long does it take to be approved for an SBA 504 loan?

The approval period is typically two to three months, but it can take longer.

How much can you borrow with an SBA 504 loan?

Normally the limit is $5 million, although renewable-energy projects have a ceiling of $5.5 million.

Can you apply for an SBA 504 if you have bad credit?

Anyone is welcome to apply, but applicants with low credit scores probably will not be approved for an SBA 504 loan. The SBA does not state an official minimum credit score to be considered for loan approval, but consultants that assist SBA loan applicants say the minimum is 680 or higher on a scale with a top score of about 850.