SBA 504 Loan: What It Is and How to Apply

In this article, we will understand SBA 504 Loan for startups, the requirements and how to make an SBA 504 Loan application.

The SBA 504 Loan of the U.S. Small Business Administration (SBA) is a Certified Development Company program that intends to provide finance for the acquisition of fixed assets, which often refer to real estate, buildings, and equipment, at prices below those of the market. The small business administration provides a variety of loan programs designed to meet the unique capital requirements of developing businesses to meet its objective to encourage the expansion of companies. Three parties, the business owner, a traditional lender, and a qualified development company (CDC), share the loan under the SBA 504 loan scheme. In this article, we will understand SBA 504 Loan for startups, the requirements for SBA 504 Loan, and how to make an SBA 504 Loan application.

SBA 504 Loan and small business

SBA 504 loans provide accessible financing for major purchases like real estate or large machinery. SBA 504 loans are a great choice for small-business owners who wish to make large purchases since they have timeframes as long as 25 years with financing of up to $5.5 million. As long as small business owners can qualify and afford to wait for capital, it can be a great aid. However, like the majority of small business administration schemes, SBA 504 loans have strict criteria and a stretched application procedure. It may take many months to close.

What is an SBA 504 Loan?

SBA 504 loans, commonly known as CDC/504 loans, are federally guaranteed small business loans provided through Certified Development Companies. Large company expenditures like real estate or equipment can be financed over a lengthy period (up to 25 years) with the help of 504 loans. It is one of the three main loan programs offered by the U.S. Small Business Administration (SBA), along with 7(a) loans and microloans.

How does the SBA 504 Loan work?

Each SBA 504 loan pulls funding from three sources: a traditional lender (usually a bank) contributes 50%, the company owner contributes a minimum of 10%, and a Certified Development Company (CDC) contributes the remaining 40%. Business owners may need to put down as much as 20% in certain situations. However, federal funding will cover no more than 50% of the overall project cost under any circumstances.

Although most loans have a $5 million ceiling, certain projects could be eligible for up to $5.5 million.

Term10, 20, or 25 years (based on loan)
Rate of InterestsRates are normally approximately 3% of the amount borrowed and are based on the five- and 10-year US Treasury notes.
FeesSBA, CDC, and other bank or credit union fees are often included in fees. The only upfront expense for a company owner is the 10% down payment since these costs are included in the overall loan amount.
Down Payment10% - it might be more for new businesses or assets with a specific application, such as fuel stations, car washes, bowling alleys, etc.

Pros and Cons of SBA 504 Loan

Here are some advantages and disadvantages of SBA 504 loans to get a better understanding:

Pros and Cons of SBA 504 Loan


  • Buy commercial property
  • Scale the business
  • Refinance other commercial debts
  • More funding for long-term investments
  • Get greater credit limits with lesser down payment


  • Demands more paperwork and a higher credit score
  • Long wait period between loan application and closing
  • Most non-profits don’t recieve the loan
  • Not an option for “fast money”

How does SBA 504 Loan help small business startups?

SBA 504 loans are an excellent option for small-business startups that want financing for expensive expenditures since they have loan periods as long as 25 years and may provide up to $5.5 million in funding. Startups can expand their business by developing or improving infrastructures, such as utilities, roadways, or parking lots, with the help of a 504 loan. A 504 loan can also be used by business owners to refinance additional commercial loans. The SBA-backed 504 loan could be the best option for entrepreneurs that are having trouble obtaining traditional finance.

SBA 504 Loan for small businesses or startups’s growth

The U.S. government founded the Small Business Administration particularly to help startups, small enterprises, and entrepreneurs. The SBA 504 loan program could be beneficial if entrepreneurs need significant funding but are unable to get it from angel investors or venture capital firms. These loans provide long-term funding for a range of fixed assets, such as equipment and real estate, and are directly guaranteed by the SBA, allowing startups to stride forward toward growth without funding restrictions.

Things to consider before applying for an SBA 504 Loan

There are many different qualifying criteria for SBA 504 Loans, albeit they are not as strict as some other forms of loans. The borrower, lenders, and even the project you’re going to start must abide by them.

Eligibility criteria

Both basic SBA loan eligibility standards and 504 loan program-specific requirements must be met by borrowers. Typical SBA loan specifications include:

  • Meet the SBA’s criteria for small enterprises
  • Not in defaults on any federal student loans or any government debts in general
  • Acceptable credit rating

Specific conditions for SBA 504 loans are:

  • Must operate in the United States as a for-profit business
  • Less than $15 million in net wealth
  • Average net earnings for the two years preceding the application should be less than $5 million
  • The initiative should achieve other objectives of public policy or maintain a certain number of job opportunities

Lender requirements

When it comes to lenders participating in the 504 loan program, there are some strict conditions:

  • Obtain the required minimum level of lending activity and should be actively lending to clients
  • Consult with CDCs
  • Should be a private sector lender with SBA approval
  • Have a governing body with nine or more voting members
  • Have permanent, full-time qualified management
  • Possess full-time, qualified personnel

Project requirements

The project must adhere to rules for employment generation. If not, it must achieve public policy objectives or community development targets while preventing the CDC from falling short of its overall target rate of creating jobs. The project must also adhere to usage specifications and, if necessary, adhere to “green” standards.

Requirements for going green with an SBA 505 loan

When utilizing an SBA 504 loan to finance a green project or enterprise, one of the following requirements must be met.

  • The project’s objective is to produce renewable energy
  • Project objectives include a 10% or more reduction in energy use
  • Buildings certified by LEED are the project’s end aim
  • The project’s objective is to use sustainable design elements

Important post-closing requirements to consider

There are further conditions, limits, and covenants to follow after a loan has been granted. Neglecting to do so might have significant consequences.

  • Changes in ownership – Changes in company ownership need Small Business Administration clearance. This might constrain business owners without a qualified buyer. If the 504 loan isn’t paid off when the current owner wants to retire, it might be troublesome for company succession. This involves company “control” not just ownership. Written SBA permission is required.
  • Hazard insurance – SBA 504 loan borrowers must provide proof of hazard insurance annually. This insurance must match the SBA loan sum. This may be costly during loan origination. However, as the loan principle decreases, insurance expenses will decline.
  • Taxes – The Small Business Administration takes taxes and your tax obligations as a borrower extremely seriously. If the loan is secured by real estate, you must provide proof of paid property taxes between May and October. If just equipment/machinery is being financed, this does not apply.
  • Financial responsibility proof – The SBA also wants confirmation that you’re meeting your other financial obligations. You must send the Small Business Administration your corporate tax return routinely. The same goes for yearly financial statements produced by an expert.
  • Business protection – The SBA wants to ensure your business’s stability. The death of a key employee often causes financial troubles for a company. The SBA requires all critical employees to carry life insurance.
  • Additional encumbrances – You can’t use 504 loan collateral to get further borrowing without SBA approval. Before encumbering 504 loan collateral, seek SBA clearance in writing.

How to apply for an SBA 504 loan?

You must find a Certified Development Company (CDC) to be approved for an SBA 504 loan. Your application will be processed by these nonprofit groups for economic development, who will also organize your funding and apply to the SBA. A list of CDCs is available on the SBA website. You’ll need the following paperwork to seek an SBA 504 loan:

  • A business strategy
  • Receivables and accounts payable.
  • Contractors’ projections for construction loans.
  • Cost justification for loans on equipment loans.
  • The past three years’ worth of business and individual tax returns.
  • Both corporate and individual financial statements.

Should you also consider SBA 504 loan alternatives?

SBA 504 loans are a terrific option for financing significant facility upgrades or equipment expenditures, but not every company owner should use them. SBA 504 loans close in one to two months. Complex acquisitions might take longer to close. SBA Express loans provide speedier approval than 504 loans but have lower borrowing maximums of $500,000. If you need more, seek a business line of credit.

SBA 504 loans aren’t for working capital or inventory. If you qualify, an SBA 7(a) loan may be a better option. Additionally, online lenders are less rigorous than government-backed loans if the business doesn’t qualify. These lenders provide equipment finance, business vehicle loans, and commercial real estate loans.

Get a business valuation from experts to get qualify for an SBA 504 loan with Eqvista!

SBA 504 loans are a great way for small companies to get money. However, it requires extensive documentation to verify your eligibility. The loans have lengthy application procedures and strict restrictions. You do not want to delay it by providing incorrect values in the paperwork.
A team of professionals at Eqvista can assist you with the business valuation needed for SBA loans, which are significantly more effective and simple to get for every industry. Contact us today to get your valuation started!

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