Pros and Cons of the SBA 504 Loan | Fora Financial Blog
Pros and Cons of the SBA 504 Loan
March 23, 2018

Pros and Cons of the SBA 504 Loan

The Small Business Administration offers 504 loans that can be used to help businesses grow by providing funds for specific purchases. In this post, we’ll explain what a 504 loan can do for a business, along with some of the potential advantages and disadvantages of this product.

What are 504 Loans?

SBA 504 Loans are long term, fixed rate loans, granted to small businesses who are purchasing real estate or equipment. Loan amounts go up to $5.5 million, and the repayment period can be either 10 or 20 years.

To qualify for an SBA Loan, a business need to meet the following 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.

Advantages of 504 Loans

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

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.

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.

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

Disadvantages 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.

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.

The restrictions of an SBA Loan are another potential disadvantage. Unlike SBA 7(a) Loans, 504 Loans cannot be used as working capital. The funds 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.

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!

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Jess has a passion for helping business owners build their brand and connect with their audience. She writes about money, tech, health, and travel for blogs and businesses.