What is an SBA 504 loan?

This article will help you understand:

• the SBA 504 loan program
• SBA loan eligibility requirements
• SBA 504 loan terms.

Importantly, it will provide information to evaluate whether you’re a qualified candidate and if an SBA/CDC 504 loan is right for you.

What an SBA 504 loan really is?

SBA 504 loans, also called SBA CDC/504 loans are small business loans offered through Certified Development Companies (CDCs), and fully guaranteed by the federal government. CDCs are community-based partners that regulate and promote economic development in their specific communities, and are fully certified and regulated by the SBA.

For each SBA 504 loan,

• the CDC provides 40% of the capital
• a financial institution (bank or credit union) provides 50%
• and the small business owner provides the final 10% in a down payment.

Borrowers can qualify for up to $5.5 million for some projects, though the cap for financing is usually at $5 million.

SBA 504 loan rates, fees and repayment terms

SBA 504 loans have specific terms unique to the CDC/504 program. Here are the SBA loan rates, fees and terms:

What can an SBA 504 loan program be used for?

Unlike flexible working capital, which is the primary use of an SBA 7(a) loan (see what is an SBA 7(a) loan), SBA 504 loans are meant to finance major fixed assets. This includes

• real estate
• equipment
• and other fixed assets.

According to the SBA, these purchases are meant to “promote business growth and job creation,” which means they’re not meant to finance everyday expenditures, such as payroll, inventory, and overhead, or supplement cash flow. Borrowers who use SBA 504 loans to purchase large fixed assets can purchase either new or used machinery, but the asset must have an estimated operating life of at least 10 years.

For real estate, borrowers have options to

• Purchase
• Renovate
• or convert existing buildings.

Initially, existing buildings must be more than half owner occupied at 51%; for new buildings, the requirement is higher at 60 percent. Borrowers must also grow their occupancy of new buildings to 80% within 10 years. SBA 504 loans are also used to upgrade facilities of a building, such as utilities; land, streets or access points, such as parking lots; and landscaping.

Borrowers may not refinance existing debt through an SBA CDC/504 loan.

SBA 504 loan eligibility requirements

In contrast to other types of business loans, such as lines of credit or term loans, SBA 504 requirements are intensive and stringent. Foremost, you need to have a strong credit score and credit history; the SBA doesn’t provide a specific minimum credit score, but borrowers generally need to be in very good or excellent personal and business credit standing for SBA 504 loan approval.

The SBA requires

• that the business operates as a for-profit company in the U.S. (or one of its territories, such as Puerto Rico or the U.S. Virgin Islands).
• a tangible net worth of less than $15 million,
• average net income must be less than $5 million after your federal income taxes for the two fiscal years before you apply for the loan.
• U.S. non-profits are not eligible for the SBA 504 loan program, even if they operate in the U.S. or its territorial possessions.

Your investment with the SBA 504 capital must

• create or retain jobs,
• increase revenue and income for the local community;
• revitalize or redevelop a community business district,
• or promote other public policy goals, such as contributing to, diversifying, and improving the local community.

You’ll have to be able to prove your capital use will meet these goals.

SBA loan requirements also include that you have experience running and developing a business. This includes a strong business plan, good credit standing, and management experience. You must also have the ability to repay the loan.

What do you need to apply for an SBA 504 Loan?

The SBA requires strong documentation for an SBA 504 loan application:

• Business and personal federal income tax returns (generally two to three years’ worth)
• Business financial statements, including a P&L, balance sheet and cash flow report
• Business debt schedule
• Business and personal bank account statements
• Collateral
• Personal guarantee
• Business plan
• Appropriate related documentation for contractor estimates, real estate purchases or existing leases, or equipment purchases (depending on how you plan to use the loan)
• Additional business history
• Credit history

The SBA may also ask you to fill out specific forms related to the loan (including form 159 and 355) as well as include various legal documents, such as your business license. You may also have to include more detailed personal information, such as a personal resume.

Note that the SBA 504 loan application process is particularly lengthy and intense, which means SBA 504 loans aren’t a match for businesses that need immediate capital (even if they meet the qualification requirements).

Partnering with a lender will help you make sure you gather the correct documentation; they’ll also help you submit any missing documents you’ve missed the first time you submit the application (this is common, which is why working with a lender is crucial).

Alternatives to an SBA 504 loan

The SBA offers alternatives for borrowers who don’t fit the SBA 504 loan requirements:

• SBA 7(a) loan: The most popular SBA loan program, SBA 7(a) loans provide flexible working capital up to $5 million as either a term loan or a line of credit for generally business financing needs
• SBA microloans: SBA microloans provide up to $50,000 of flexible capital to start or expand a new business
• SBA express loan: SBA express loans are fast-approval loans of up to $500,000, with a decision within 24 to 36 hours

SBA 504 loan vs SBA 7(a) loan: What’s the difference?

SBA 504 loans and SBA 7(a) loans are the two most popular loan programs through the SBA. SBA 7(a) loans are meant to provide flexible working capital, whereas a capital from an SBA 504 loan is meant to finance the acquisition, construction or repair of major fixed assets.

Is an SBA 504 loan a good fit?

As with any SBA loan, SBA 504 loans are highly desirable due to their high capital amounts, long repayment terms, and low interest rates — but that also means they’re highly competitive. If you’re not able to get an SBA 504 loan the first time around, you can apply multiple times.

Partnering with a lender as soon as possible can help better your chances for approval, and help you figure out a long-term plan for obtaining an SBA CDC/504 loan. Fora Financial is a strong choice for a financial partner for an SBA 504 loan, since they have extensive experience working with borrowers across multiple industries, and personally guide applicants through the SBA 504 loan process.

Before you dive into the SBA 504 loan application process, you should have strong knowledge about your local community’s economy and business landscape. Some questions to consider are; What are they missing, and what are their strengths and weaknesses? Where can your company help improve the local economy, contribute to community goals, and help develop business development districts? The better you know your community, the better you can develop your business plan and make a strong case to the SBA and CDC that you’re an excellent candidate for an SBA 504 loan.