SBA 504 Loans: What Are They? How Do You Apply?

Among the Small Business Administration’s (SBA) myriad loan options is the 504 loan, a funding program designed to help business owners finance major assets. If you’re curious about the SBA 504 loan program, keep reading for a detailed breakdown of the loan terms, eligibility requirements for small business owners, and the application process.

SBA 504 loans at-a-glance

Don’t have too much time. Here’s what you need to know about 504 loans (but we recommend you read the whole post to get all the details).

What is the SBA 504 loan?	A loan of up to $5 million for fixed assets such as land, real estate, equipment, and machinery.
What can you use the loan for?	To purchase land, buildings, or equipment; to construct new facilities; to improve or modernize existing buildings, streets, landscaping, parking lots, and utilities.
What can’t you use the loan for?	Working capital, inventory, refinancing debt, or investing in rental real estate.
Who issues the loan?	A certified development company (CDC) issues 40 percent of the loan through debentures, a capital-raising tool sold to investors that fund the debt; a third-party lender issues 50 percent of the loan; and as the borrower, you pay 10 percent as a down payment.
Are interest rates fixed or variable?	They’re fixed for the CDC portion of the loan and for 2023, the current SBA 504 loan rates are currently hovering around 6 percent or more of the total loan amount. (That effective rate includes fees paid to the CDC, SBA, and central servicing agent based on debenture pricing.) For the portion covered by a private lender, the interest rate could be fixed or variable.
What are the repayment terms?	Between 10 and 20 years.
Who is eligible?	For-profit businesses operating in the United States that abide by the following: 1) fall within the SBA size guidelines for businesses, 2) have a net worth of less than $15 million, and 3) have a net income of less than $5 million.
How do you apply?	Contact a CDC in your area. Note: If you need fewer than $500,000, you could also qualify for SBA express loans, which means you’ll get your funds faster than usual. The Consolidated Appropriations Act established a 504 Express Loan Program. The program authorizes experienced lenders to expedite 504 loans under $500,000, so business owners who need smaller amounts of money can get their cash much quicker.

What is a 504 loan? 

The SBA’s 504 loan provides business owners with long-term fixed rate financing for large assets. Think: land, real estate, equipment, and machinery. The primary purpose of the 504 loan program is to fund business projects and endeavors that will lead to job creation and business growth. 

You can get 504 loans through CDCs, which are non-profit organizations that partner with the SBA to stimulate economic development in their communities.

What can you use the loan for? 

504 loans must be used to fund specific types of expenses. If you’re approved for one, you can put the funding toward: 

• Purchasing land or buildings
• Expanding existing buildings or constructing new facilities
• Purchasing long-term machinery and equipment 
• Improving or modernizing existing land, facilities, streets, parking lots, landscaping, or utilities 

Keep in mind that you can’t use a 504 loan to cover working capital, purchase inventory, invest in rental real estate, or restructure your debt. 

What are the repayment terms and interest rates?

If you qualify for a 504 loan, you can get up to $5 million in funding with a 10-year or 20-year repayment term and a fixed interest rate of around 6 percent of the total debt. However, it’s important to note that the interest rate is only fixed for the portion of funds you receive from the CDC.

With 504 loans:

• Borrowers (that’s you!) contribute 10 percent as a down payment
• CDCs contribute 40 percent of the financing
• Third-party, private lenders supply the remaining 50 percent

Depending on the third-party private lender you partner with, you could get a fixed or variable interest rate. You might also have a different repayment term for the portion of the money that is loaned to you by that private, third-party lender. 

Who’s eligible for a 504 loan?

To qualify for a 504 loan, you need to be a for-profit company operating in the United States or its territories. Your business should also comply with SBA size guidelines, have a tangible net worth of less than $15 million, and have an average net income of less than $5 million (after federal income taxes for the two years prior to your loan application).

Plus, you have to meet at least one economic development objective with your projects or plans. There are 16 possible objectives, including community development, renewable energy production, sustainable building design, and business growth for a veteran-owned or woman-owned operation. 

That’s not all, though. As with most other SBA loans, it’s important to have a viable business plan, proof of expertise in your line of work, and cash flow statements or projections that demonstrate your ability to repay the loan. 

The pros and cons of the 504 loan

As with any SBA loan, there are advantages and disadvantages to applying for the 504 loan program. Here are some of the benefits: 

• You can get a larger amount of capital for bigger projects or purchases. 
• Fixed interest rates allow you to budget more easily and prepare a realistic long-term repayment plan. 
• The loan is fully amortizing, which means you won’t be left with a balance to pay at the end of your repayment term. 
• You only have to put 10 percent down. What’s more, you can borrow that amount as long as it’s not with an SBA loan. 
• If you qualify for the 504 Express Loan Program, you can get funds much quicker. 

There are also a few downsides to consider, including the following:  

• The application and approval process can take a while—usually anywhere from 30 to 90 days. 
• The portion of the loan from the third-party lender will have its own interest rate, which may or may not be fixed. 
• You may have to provide a personal guarantee. 
• The SBA doesn’t specify a minimum credit score for 504 loans, but most lenders want you to have a score of at least a 680. 

504 loans are a great option for businesses that need long-term financing for big purchases or major construction or renovation projects. Maybe you want to buy a second store, for example, expand your facilities, or invest in heavy-duty machinery. If you have strong business and personal credit, a specific plan for your funds, and a long-term strategy for paying off your small business loan, applying for the 504 program could be a smart move. 

However, if you need a smaller amount of capital or quick cash for operations, a 504 loan is probably not your best option. Make sure you think about your goals for resource allocation, too. You might have a construction project or major purchase in mind but want flexibility to distribute funds across different areas of your business; in that case, it’s better to apply for a loan like the SBA 7(a) loan instead of the 504. Note: Reciprocity has been established between SBA 7(a) and 504 loans, which means business owners can use a 7(a) or 504 loan to refinance their other loan.

How do you apply for a 504 loan? 

If you’re interested in getting a 504 loan, the first step is to search for a CDC in your area. The CDC you work with will let you know which documents you need to gather to get prequalified for the loan. In general, it’s helpful to have the following paperwork on hand: 

• Three years of business and personal tax returns
• Business financial statement for the past three years, including balance sheets and income statements
• Business plan, including one year of financial projections
• Personal financial statement
• Purchase agreement, cost documentation for equipment/machinery, and/or cost estimates for construction or renovation
• Collateral analysis
• Credit history