SBA 504 Loan Requirements

If you’re an entrepreneur looking for more financial tools to help manage the cost of running your business, the 504 SBA loan offered by the small business administration is one you should have heard about.  The 504 loan program has benefits that include high approval rates and long term repayment plans. 

Key Points:

• Be meticulous in your document filing
• Know your business
• Be patient - It takes time

Some entrepreneurs will leverage their credit in order to request a loan or other types of credit. 
When requesting a 504 SBA loan, having a healthy credit score is a key part of the approval process.

There are, however, a few other key requirements that entrepreneurs should consider prior to submitting their application.

Here’s what you need to know:

• SBA Loan Requirements
• What Benefits SBA 504 loans provide to small businesses
• Challenges

SBA Loan Requirements

The Small Business Administration (SBA) makes available to qualified small business owners a range of SBA loans and financial products to help manage different aspects of the cost of running a business. These financial tools include overdraft lines of credit, 7(a) loans for businesses needing to make investments in buildings or equipment or even microloans.

Prior to submitting an application for an SBA 504 loan, there are some key lending requirements that borrowers should prepare for and consider.

Credit Score: What are the SBA loan credit score requirements? Borrowers should have a solid personal credit score when applying for a 504 loan. Scores ranging from 580-669 are considered to be moderate in their risk. A higher score would likely give borrowers a much better chance of having their loan request approved. It may also be a good idea for business owners to work on their business credit score as well in the event that they need to provide their business credit details.

Good Financial Standing: The borrower should be in good financial standing and not in arrears on any other existing financial products. These products could include, but aren’t limited, to the following: lines of credit, credit cards and other payments that a 504 loan lender would review in order to gauge an applicant’s ability to repay their loan.

Financial Documentation Needed: A minimum of 2 years worth of tax returns but the tax return requirement is also at the discretion of the loan reviewer. Ideally, the applicant should be able to provide at least 3 years worth of tax returns.

A Detailed Income Statement: An income statement focused on the subsequent two years after receipt of a 504 loan. This income statement should provide some insight into how the loan will affect the business’s growth.

Debt Details: Provide detailed information on current debt load. This information would also include repayment details, amount owed and any other additional terms that the SBA may request.

SBA 504 loans have three main funding components that also include the SBA portion of the loan in addition to 50% provided by the bank lender. Applicants will also need to put down up to 10% in equity towards their loan. For companies requesting an SBA 504 loan do note that the SBA will require an in-depth review of the business’s finances during the application process.

What Benefits SBA 504 loans provide to small businesses

SBA 504 loans can be an incredibly beneficial financial product for small businesses. There are a few drawbacks, but overall this loan program is highly favorable for small business owners looking at thoughtfully growing their business while managing the long-term cost of financial growth.

• Approval Rates: If a business owner meets the minimum requirements of a 504 loan it is highly likely that their request for a loan will be approved. This likelihood of approval gives entrepreneurs the ability to use their revenue for spending unrelated to the cost of expanding their business infrastructure.
• Repayment Terms: 504 Loans have a longer term for repayment. Borrowers can opt for 10, 20 or 25 year repayments depending on the project that they’ve decided to finance and their projected ability to make monthly repayments.
• Manage Growth: Small business owners requesting a 504 loan can carefully add much needed resources to their business without causing short-term or long-term financial strain.

Challenges

There are some challenges specific to 504 loans that do need to be considered.

• There’s a significant amount of documentation when submitting the loan application. That’s not a reason to be discouraged, but prepare to be organized.
• Loan repayment terms: For business owners who would like to prepay their 504 loan there is a prepayment penalty that could be incurred. It’s important to discuss with your lender the financial impact of prepaying a 504 loan.
• If considering a 504 loan vs. a 7(a) it may be a little challenging to figure out what the difference is between the two products. You might want to look into what is an SBA 7a loan.
• Know your Business: Having clarity around the business’s needs will make it easier to know which loan product is ideal for the business. Creating a ‘needs rubric’ may help borrowers better communicate their financial needs with their lender so that they can make a more informed borrowing decision.

Parting Words

Business growth is a fantastic challenge for a small business to experience. Leveraging a 504 SBA to manage that growth to expand a retail space, buy land or invest in a new warehouse or heavy equipment is a great financial resource to explore. Fora Financial works with small businesses on finding the financial product that is right fit for their current business needs.

Whether a business is needing a Merchant Cash advance or a small business loan, Fora Financial can provide those resources for qualified small business loan requests.