If you are a small business owner in the U.S., securing financing for major purchases such as real estate, equipment, or facility upgrades can be a challenge. Fortunately, the SBA 504 Loan Program, backed by the U.S. Small Business Administration (SBA), offers long-term, low-interest loans to help businesses expand.
In this guide, we will cover everything you need to know about the SBA 504 Loan, including eligibility requirements, loan amounts, interest rates, approved uses, application process, pros and cons, and frequently asked questions (FAQs).
1. What is the SBA 504 Loan Program?
The SBA 504 Loan is a government-backed loan designed for small businesses to purchase fixed assets such as commercial real estate, heavy equipment, and other capital expenditures.
Unlike the SBA 7(a) loan, which can be used for general business expenses, the SBA 504 loan is specifically for long-term investments that promote business growth.
Key Features of the SBA 504 Loan:
- Maximum loan amount: $5 million (up to $5.5 million for energy-efficient projects)
- Repayment terms:
- Real estate purchases: Up to 25 years
- Equipment purchases: Up to 10 years
- Fixed interest rates (no fluctuations)
- Low down payment requirement (usually 10%)
- Loan structure:
- 50% from a traditional lender (bank, credit union)
- 40% from SBA via a Certified Development Company (CDC)
- 10% from the borrower (small business)
This means that small businesses only need to provide 10% of the total funding, while the rest comes from the lender and SBA-backed funds.
2. Who is Eligible for an SBA 504 Loan?
To qualify for an SBA 504 Loan, a business must meet the following requirements:
- Be a for-profit business operating in the U.S.
- Have a tangible net worth of less than $15 million
- Have an average net income of less than $5 million over the last 2 years
- Use the loan for eligible purposes such as real estate or equipment purchases
- Have a personal credit score of at least 680 (recommended)
- Have been in operation for at least 2 years
Nonprofit organizations and businesses engaged in passive real estate investment are NOT eligible.
3. Maximum Loan Amount & Interest Rates
Maximum Loan Amount:
- Standard businesses: Up to $5 million
- Energy-efficient projects: Up to $5.5 million
For larger projects, businesses can combine multiple SBA 504 loans.
Interest Rates:
- The SBA 504 loan has fixed interest rates, meaning your monthly payments won’t change over time.
- The interest rate is based on the current 10-year or 25-year U.S. Treasury bond rates, plus a small percentage set by SBA.
- Typically, SBA 504 loan rates are lower than traditional bank loans.
4. What Can the SBA 504 Loan Be Used For?
- Purchasing commercial real estate (offices, warehouses, manufacturing facilities, retail stores, etc.)
- Constructing new buildings or improving existing facilities
- Buying heavy equipment and machinery
- Acquiring land for business expansion
- Energy-efficiency improvements (solar panels, energy-efficient upgrades, etc.)
The SBA 504 loan CANNOT be used for:
- Working capital
- Refinancing existing debt (except under special circumstances)
- Purchasing inventory or supplies
- Investing in rental properties
5. SBA 504 Loan Application Process
Since the SBA does not directly lend money, businesses must apply for the SBA 504 loan through a Certified Development Company (CDC), which works with private lenders to provide financing.
Step-by-Step Application Process:
1. Find a Certified Development Company (CDC)
- Use the CDC Locator tool to find a lender near you.
2. Prepare a Business Plan
- Explain why you need the loan and how the funds will be used.
3. Gather Financial Documents
- Business tax returns (last 3 years)
- Personal tax returns (last 3 years) for all owners with 20%+ stake
- Profit and loss statements (P&L)
- Balance sheets
4. Submit Your Loan Application
- The CDC will review your application and determine your eligibility.
5. Loan Approval & Funding
- If approved, the CDC and lender will coordinate funding.
The SBA 504 loan approval process typically takes 30 to 90 days.
6. Pros & Cons of SBA 504 Loan
Pros:
- Low, fixed interest rates (protects against market fluctuations)
- Long repayment terms (up to 25 years)
- Low down payment (only 10%)
- Designed specifically for business growth & expansion
Cons:
- Cannot be used for working capital, inventory, or debt refinancing
- Application process can be lengthy (30-90 days)
- Borrower must contribute at least 10% of project costs
- Requires detailed financial documentation
7. SBA 504 Loan FAQs (Frequently Asked Questions)
Q1: Can startups apply for an SBA 504 Loan?
A: Generally, businesses must have at least 2 years of operational history. Some CDCs may consider startups, but additional collateral may be required.
Q2: How does the SBA 504 Loan compare to the SBA 7(a) Loan?
A: The SBA 7(a) Loan is more flexible and can be used for working capital, refinancing debt, or purchasing inventory. The SBA 504 Loan is specifically for real estate and equipment.
Q3: How long does it take to get approved?
A: The SBA 504 loan process usually takes between 30 and 90 days, depending on how quickly you provide the required documents.
Q4: What happens if I sell the property before paying off the loan?
A: If you sell the property or equipment before the loan term ends, you may need to repay the remaining balance or refinance.
Final Thoughts: Is the SBA 504 Loan Right for Your Business?
The SBA 504 Loan is one of the best financing options available for businesses looking to purchase real estate, equipment, or other long-term assets. It provides low-interest, long-term financing with a low down payment requirement, making it an ideal choice for growing businesses.
Want to Apply? Here’s How to Get Started:
- Find a CDC lender: Use the SBA CDC Locator
- Learn more about the SBA 504 Loan program: Visit the SBA website
