Are you looking to finance a major fixed asset – like real estate or large equipment – as part of your business’s growth strategy?

An SBA 504 loan might be an efficient and affordable solution.

What Are SBA Loans?

Ask your lender for a complete checklist of required documents.

The United States Small Business Administration (SBA) is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

The SBA guarantees a portion of each loan to mitigate lender risk and enable more small-business owners – including those in underserved communities – to access the capital they need. (In the case of SBA 504 loans, up to 40% of each loan is backed by the SBA.)

Reasons to Consider an SBA Loan

SBA loans can offer small businesses several key advantages, including:

• Competitive rates: Because they’re a lower risk for lenders, SBA loans often feature lower interest rates.
• Lower fees: SBA loans may involve an upfront and/or yearly service fee, but these are generally minimal.
• Longer terms: Maximum maturities range from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate).
• More flexibility: Loan amounts range from $500 to $5.5 million, depending on your needs and capacities.
• Continued support: The SBA and its local partners offer free and low-cost business training and counseling.

What Is the SBA 504 Loan Program?

Also known as CDC/504, this loan program provides long-term financing for major fixed assets, as well as inventory and equipment, that promote business growth and job creation. The loans are funded through community-based partners of the SBA called Certified Development Companies (CDCs).

The usual maximum loan amount is $5 million. For certain energy projects, borrowers can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total. Interest rates are pegged to U.S. Treasury issues and generally total around 3% of the total loan amount. Interest may be financed with the loan.

Commonly, 504 loans require an owner equity contribution of 10%, with 50% backed by your bank or credit union and 40% backed by an SBA debenture.

Am I Eligible?

Specific eligibility requirements for SBA 504 loans can vary by lender. For instance, the SBA doesn’t designate a minimum credit score or length of time in business, but individual lenders can and do set their own rules. In nearly all cases, though, your business needs to:

• Physically operate as a for-profit company in the U.S. or its territories
• Pursue a sound business plan in an eligible industry (e.g., excluding lending and gambling)
• Meet SBA size standards (which depend on your industry and annual revenue)
• Have a tangible net worth of less than $15 million
• Have net income less than $5 million per year (after federal income taxes)
• Show owner equity (time and money you’ve invested in the business)
• Be in good standing on all existing government debts
• Demonstrate a need for funds and the ability to repay them from projected business cash flow

How Can I Use It?

SBA 504 loans can be used for a variety of purposes, including:

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

However, unlike more general business loans, 504 loans can’t be used for shorter-term needs like working capital or inventory. They also can’t be used for investing in rental real estate or other passive or speculative business activities.

In select cases, 504 loans can be used to refinance existing commercial debt that was originally incurred to finance fixed assets. There are a number of other eligibility factors, and regulations have recently changed. Consult your lender to learn more.

How Do I Apply?

While SBA 504 loans are unique in that they’re funded through regional CDCs, you can work directly with your chosen lender to get the application process started. Here are some of the documents you may need to provide:

• Profit and loss statements (current within 180 days)
• Projected financial statements (one year)
• Ownership and affiliations
• Business license or certificate
• Loan application history
• Income tax returns (three years)
• Resume
• Business overview and history
• Business lease

Ask your lender for a complete checklist of required documents. Once you’ve finished your application, your lender will submit it to the SBA for approval, close the loan, and disburse the funds. The whole process varies quite a bit, but generally takes between 60 and 90 days.

How Do I Pay It Back?

As with eligibility requirements and application processes, repayment terms for SBA 504 loans can vary by lender. Normally, they’re structured as term loans with a fixed rate and a maturity term of either 10 or 20 years. That means you’ll pay a set amount every month until the end of the term, much like a standard residential mortgage or auto loan.

504 loans can be prepaid, but only in whole, and borrowers may be subject to a prepayment penalty depending on the age of the loan.

What Are My Other Options?

There are several other types of SBA loans you may want to consider, including:

• 7(a) loans, which are the most popular SBA loans and can also be used for acquisition and working capital
• Express loans, which feature an accelerated turnaround time and have special options for exporters
• Microloans, which provide up to $50,000 for smaller startup and expansion needs
• Disaster loans, which help businesses overcome economic injury or damage in the wake of a declared disaster

Your lender can also help you to investigate non-SBA loan products and weigh the pros and cons.

Take the First Step Today

To explore all your small business financing options, including SBA 504 loans, consult your financial institution.

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