August 28, 2019

The Pros and Cons of the SBA 504 Loan

What are 504 Loans?

SBA 504 Loans are long term, fixed rate loans, granted to small businesses who are purchasing commercial real estate or equipment. Loan amounts go up to $5.5 million, and the repayment period can be either 10 or 20 years. In order to supply these loans, the SBA partners with Certified Development Companies (CDC), which are non-profit corporations that focus on promoting economic development in their communities. To qualify for an SBA Loan, a business need to meet the following eligibility requirements:
  • Be a for-profit company.
  • Have a net worth less than $15 million.
  • Have an average income less than $5 million, after taxes, for the past two years.
  • Be able to repay the loan on time with business income.

What Are the Pros of 504 Loans?

In the right situation, applying for an SBA loan can be a smart financial decision for a small business.

1. Large Loan Amounts

By covering up to 90 percent of the total cost of a project, a 504 Loan allows small businesses to make substantial purchases that wouldn’t be possible otherwise. In most cases, a lender will cover 50 percent, the SBA will cover 40 percent, and the business will be responsible for the remaining 10 percent of the total cost.

2. Affordable Interest Rates

Fixed interest rates are a major benefit for borrowers when the repayment period spans 10 to 20 years. A fixed rate means that payments will be the same for the length of loan period, making it easier to budget for the payments each month.

3. Easy to Qualify For

Most small businesses can qualify for an SBA Loan; since the SBA guarantees a portion of the loan, it makes it a safer option for lenders. Through their tips and resources, the SBA tries to make it as easy as possible for small business owners to navigate the application process. SBA-504-In-Text

What Are the Cons of 504 Loans?

While SBA loans are a great option for small businesses in need of extra cash to make big purchases, there are some negative factors to consider.

1. Must Be Used to Create Jobs

First, in addition to the general guidelines for qualifying for an SBA Loan listed above, the small business must also create one job, or retain an existing job, for every $65,000 they receive through the SBA 504 Loan. If that isn’t possible, a community development or public policy goal must be met by the business. Examples of these goals include developing rural areas and creating stability in your local economy.

2. Usage Restrictions

The restrictions of an SBA Loan are another potential disadvantage. Unlike SBA 7(a) Loans, 504 Loans cannot be used as working capital. The business financing can only be used for specific purchases, outlined by the SBA, including the following:
  • Purchasing existing buildings.
  • Purchasing and improving land.
  • Building new facilities or improving existing buildings.
  • Purchasing new equipment.
  • Paying off previous debt that occurred from these purchases.

3. Percentage of Loan is Covered by Loan Applicant

Finally, one of the advantages of the loan could also be a potential downside. While the loan will typically cover 90 percent of the project amount, that still leaves 10 percent to the borrower. That percentage is relatively low, but can be a large sum of money, depending on the total project cost.


For large purchases, a 504 Loan is a great option that allows business owners to expand without going into debt. To start, ensure that your small business and its project meet the 504 Loan qualifications, and determine if you’ll be able to cover the cost of your share of the project. If so, an SBA 504 loan could be a viable option for your business! Editor’s Note: This post was updated for accuracy and comprehensiveness in August 2019.