What is an SBA 504 Loan and How Can You Apply?
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 promoting 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 on the part of 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 particular 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 repayment terms, larger loan amounts, and no additional collateral is needed to apply.
How Can You Qualify for This Loan?
Like many bank loans, qualification can depend mostly on your credit score. The higher the score, the better your chances will be 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 proof of loan repayment is necessary. This means 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 in 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 the application is submitted.
Specifically, for this program, current buildings you own must be 51 percent owner-occupied. 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, this means that buying an apartment building that you wish to lease is out of the question unless you plan to lease only 20-40 percent of the apartments.
Another rule for this program is that any equipment your business buys must have at least a 10-year lifespan. This cuts out costs like computers and software and ensures only larger equipment, like farming machinery, are 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 a SBA 504 Loan?
Did you know that there are over 200 CDCs 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.
Most likely, you’ll also 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. For every $65,000 loaned to your business, you must hire or retain one job. 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 your CDC/504 Loan application.
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 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, normal operations, rental property, and potential real estate purchases can’t be financed with this type of loan.
Conclusion: Consider Your Business’s Bottom Line Prior to 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, you should determine whether this is the right SBA product for your business’s industry and current situation. Always 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 a 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 November 2020.
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.