Does your business need affordable financing for large equipment or real estate-related purchases? Apply for SBA 504 loans


Also known as CDC/504 loans, the SBA 504 loans are small business loans offered by Certified Development Companies (CDC) and backed by the federal government. The US Small Business Administration loan programs have three cores; SBA 504 loans are one of them along with 7(a) loans and microloans. 


Under this program, an eligible business can borrow up to a maximum of $5 million for up to 10 or 25 years. The 10 years term is for equipment and the 25 years term is for real estate. 


Use of SBA 504 loans 

SBA504 loans are only used by for-profit businesses. As a business owner, you cannot use 504 loan amounts for speculation purposes like real estate or stock market investments: they are only supposed to be used to invest in fixed assets such as a real estate for business expansion and equipment for increasing productivity, and to expand/improve existing business facilities. 


Not only this, but the business owners who get a loan must create or retain at least one job for every $65,000 or $100,000 that the SBA guarantees. The fund should be used by the business owners in such a way that it promotes job growth or retention. 


Working of SBA 504 loans program 

A business owner cannot apply for SBA 504 loans straight away without trying to get a loan elsewhere. SBA loans should be considered the last option because the CDC prefers granting loans to businesses that don’t get funds from private banks and other financial institutions. SBA 504 loans are the last hope for business owners. 


If a business can secure funding through conventional bank loans and other sources, it should use those other avenues before resorting to SBA loans. This rule is defined to avoid flocks of business owners for the fund because SBA loans come with low-interest rates, long terms, and relatively small down payments, which are not possible in private loan options. The objective of SBA is to help business owners who have no other options left. 


Types of businesses that can apply for the SBA 504 loans program 

There are no such restrictions. The type of business doesn’t matter for the loan application. The only thing is the business should not be engaged in nonprofit, passive, or speculative activities. Also, the business should meet SBA’s definition of a small business. According to the definition, the number of employees in the business should be fewer than 250 to 150, depending on the industry. 


A few business types that often face high-fixed asset costs and benefit from SBA504 loans are manufacturers, engineering and construction companies, logistics firms, industrial or warehousing operations, packing or bottling plants, and tooling plants. 


Other businesses that benefit from SBA 504 loans are those with steady payrolls as they readily meet the SBA’s demand of job creation or retention. Other than this, the businesses in rural communities that need jobs, businesses that are owned by women, minorities or veterans, and businesses that function internationally can apply for SBA 504 loans. 


What businesses qualify for SBA 504 loans

To qualify for the SBA 504 loans, your business should meet the following criteria:

  • The business should be for-profit, operating in the United States
  • The net worth of the business should be less than $15 million 
  • The net income of the business should be less than $5 million for the two years before the application. 


Other than these specific SBA 504 loan requirements, your business should fulfill the following general SBA loan requirements. 

The business should meet the SBA definition of a small business

  • The business shouldn’t be delinquent on any government loans, including federal student loans. 
  • The personal credit should be strong. 


How to Apply for SBA 504 loans 

Identify what you are trying to invest in -

The use of SBA 504 loans is a bit limited; you can only use the fund for fixed assets. If the investment is not for the fixed assets, applying for the loan will not be worth it. You will only waste your time. So, you should identify your business investment before applying. 


Review and prepare your records -

Like other loans, documents are important in SBA 504 loan application. So, you should review and prepare before applying. Some of the important documents are two to three years' business tax returns, the business’s balance sheet, breakdown of company ownership, and financial records of the owner who owns 20%or more of the company.


Other than this, you will need payroll records to prove eligibility for an SBA loan and show your ability to meet job creation and retention requirements. 


Look for a Certified Development Company -

The CDC will provide 40% of your overall financing costs as well as confirm your eligibility for the SBA 504 program and that you will use the funds for an approved purpose. You should find a CDC in your area for easy and quick functioning. 


File a loan application -

As you have found a CDC, it’s time to file a loan application. Here, the CDC plays an important role. It puts your loan through a full underwriting process, which includes a review of your books and records. 


Find a conventional lender -

The conventional lender will be different from your CDC. After getting approval from the CDC for 40% of your projected costs, you should find a conventional lender to provide up to 50% of your total projected costs. The conventional lender is usually a commercial bank that writes the portion of your financing to be guaranteed by the SBA. 


Apply for the SBA portion -

With the help of your conventional lender, you should file an application for the SBA portion of your financing. This would be your last step before approval. This step involves some duplication of effort from the lending process with the CDC, but it’s important. 


Close on your loan -

After getting approval from the CDC and your conventional lender, you can close your loan. At this stage, you will be charged an origination fee for securing your loan. The fee will be discussed by the lender separately. Typically, it’s 1-3%of the amount it’s providing. 


Understanding the eligibility and applying for SBA 504 loans are challenging. So, you should seek help from Royale Capital.