May 18, 2022

What is an SBA 504 Loan, and How Can You Successfully Apply?

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  • Small Business Loans

  • Small Business Tips

The Small Business Administration (SBA) provides business owners with various funding options. Although most businesses pursue the 7(a) loan, the SBA’s most popular product, you should also be aware of their other SBA financing options that could better suit your business needs, including the SBA 504 loan.

What is the SBA 504 Loan?

The 504 Loan is a program that creates jobs, promotes business growth, and provides business financing. To offer loans, the SBA partners with Certified Development Companies (CDC), which are non-profit corporations fostering economic development in their communities. Initially, the SBA certifies and regulates CDCs, and then the CDC works with small businesses to provide them with funding.

With this program, the loan is a combination of efforts from three entities: a lender, the CDC, and the borrower. The lender contributes up to 50 percent of the loan, CDC covers 40 percent, while the borrower contributes 10 percent.

This loan provides several benefits over the traditional 7(a) loan, such as lower interest rates, down payments, and fees. The maximum loan amount at this time is $5.5 million. In addition, the 504 loan includes longer terms, larger loan amounts, and no additional collateral is needed to apply.

How Can You Qualify for This SBA Loan?

Like many bank loans, qualification can depend mostly on your credit score. The higher the score, the better your chances of being approved for your desired amount. In addition, if you have outstanding debt, it could deter the CDC or lender from supplying you with this type of loan.

To qualify, securing proof of down payment and loan repayment is necessary, so you’ll need a bank account with the 10 percent for your down payment and additional funds for loan repayment. Businesses with a history of bankruptcies, foreclosures, and tax liens will face difficulty securing the ideal business loan.

The net worth of your business must not exceed $15 million, with an average net income of $5 million or less (after federal income taxes) in the two years before applying.

Specifically, existing buildings you own must be 51 percent owner-occupied for this program. If you’re planning to build a new structure, it must be 60 percent owner-occupied on opening day, and this number should climb to 80 percent owner occupancy by the tenth year. For example, buying an apartment building you wish to lease is out of the question unless you plan to lease only 20-40 percent of the apartments.

Another 504 loan requirement is that any equipment your business buys must have at least a 10-year lifespan. This cuts costs like computers and software and ensures only larger equipment, like farming machinery, is financed with the loan.

Lastly, your business must use the funds to create jobs or enhance the SBA’s other goals, like energy efficiency or public policy.

How Can You Apply for an SBA 504 Loan?

Did you know that over 200 CDCs are operating in the United States? If you’re unsure if your business meets the SBA’s eligibility requirements, you can ask local CDCs for a quick discussion to find out.

We suggest bringing bank statements that prove you can repay your loan and swiftly put down a payment. In addition, you must know your business’s credit score and should provide other financial documents that will be useful to the lender.

You’ll most likely need to submit a statement that explains how you plan to use the loan to create or retain jobs and how you’ll support the SBA’s public policy goals. You must hire or retain one job for every $65,000 loaned to your business. For small manufacturers, one job must be created for retained for every $100,000 loaned.

Check out this comprehensive checklist made by the SBA before you complete the CDC/504 Loan application process.

What Types of Businesses Benefit From the SBA 504 Loan Program?

The program is available to businesses who intend to use the loan for buying land and renovating a property. Other uses for this program include the following:

  • Paying for business improvements

  • Building new facilities

  • Buying other fixed assets (like equipment and machinery)

  • Refinancing debt.

Businesses best suited for the CDC/504 Loan are for-profit businesses planning to use the loan for the previously mentioned reasons. Those that operate in non-profit, passive, or speculative work are ineligible for this program.

It’s important to note that you can’t use this loan for working capital, materials, inventory, or supplies for advertising and marketing initiatives. In addition, small business owners can’t finance normal operations, rental property, and commercial real estate purchases with this type of loan.

Conclusion: Consider Your Business’s Bottom Line Before Pursuing a 504 Loan

It’s easier to generate sales when you have money on hand — and that’s what the SBA 504 Loan can do for your growing business. Still, it would help if you determined whether this is the right SBA product for your business. Do your due diligence by comparing other available types of loans before committing to what you think is best for your business.

Has your business received an SBA 504 Loan in the past, or are you considering one? Tell us about your application experience in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2022.

Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.