SBA 504 Loans: What Businesses Qualify and How to Apply

SBA 504 loans are offered by Certified Development Companies and partially funded by a bank or credit union.
Kelsey SheehyMay 18, 2021

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There are three core SBA loan programs: SBA 7(a) loans, microloans and SBA 504 loans (also known as CDC/504 loans).

The 504 loan program differs from other government small-business loans in key ways. Namely, 504 loans are designated for large equipment or facility purchases or upgrades, and they cannot be used for working capital or to purchase inventory.

SBA 504 loans are offered by Certified Development Companies (CDCs), which support economic development and community revitalization.

Keep reading to learn more about how SBA 504 loans work, who qualifies and how to apply.

What is an SBA 504 loan?

SBA 504 loans offer long-term financing (up to 25 years) for major business purchases like real estate or machinery. Loans are typically capped at $5 million, but some projects can qualify for up to $5.5 million.

Funding for each 504 loan comes from three places:

  • A Certified Development Company (40%).

  • A bank or credit union (50%).

  • The small-business owner taking out the loan (10%). Under certain circumstances, business owners may need to put down as much as 20%.

SBA 504 loan rates, fees and repayment terms: 

  • Term length: 10, 20 or 25 years, depending on the loan.

  • Interest rates: Rates are tied to the five- and 10-year U.S. Treasury notes and are typically around 3% of the amount financed.

  • Fees: The SBA is temporarily waiving fees for lenders and borrowers as part of its coronavirus relief efforts. Under normal circumstances, fees typically include SBA, CDC and bank or credit union fees, which vary. These fees are baked into the total loan amount, so a business owner’s only upfront cost is the 10% down payment.

Who can qualify for an SBA 504 loan?

Borrowers need to meet general SBA loan eligibility requirements, as well as criteria specific to the 504 loan program.

SBA 504 loan requirements include:

  • For-profit business operating in the United States.

  • Net worth of less than $15 million.

  • Average net income of less than $5 million for the two years prior to your application.

General SBA loan requirements include:

  • Meet the SBA definition of small business.

  • Not delinquent on any government loans, including federal student loans.

  • Strong personal credit.

Nonprofit organizations, life insurance companies, religious institutions, private clubs and businesses that primarily engage in lending, lobbying or legal gambling cannot receive an SBA 504 loan.

What can an SBA 504 loan be used for?

A 504 loan can be used to purchase fixed assets that “promote business growth and job creation.” This could include a new building, equipment or machinery. You can also use a 504 loan to build or upgrade facilities, including utilities, streets or parking lots.

Unlike more general term loans, a 504 loan cannot be used as working capital, to purchase inventory, to repay or refinance debt, or to invest in rental real estate.

How to apply for an SBA 504 loan

SBA 504 loans are funded by a Certified Development Company and a bank or credit union, but it is the development company that processes your application, coordinates the financing and submits the loan package to the SBA. You can find a list of participating Certified Development Companies on the SBA’s website.

Documents needed

You’ll need the following documents to apply for an SBA 504 loan:

  • Business and personal tax returns (three years).

  • Business and personal financial statements.

  • Business plan.

  • Accounts payable and receivable.

  • Contractor estimates (for construction loans).

  • Cost documentation (for equipment loans).

This list is not exhaustive, and the CDC and bank you work with may require additional documentation to process your 504 loan application.

Alternatives to an SBA 504 loan

SBA 504 loans offer low interest rates and require a smaller down payment than many standard business loans, making 504 loans an ideal option for funding major facility improvements or equipment purchases.

But eligibility requirements are stringent, and closing can take as long as 45 days. If you don’t qualify for an SBA 504 loan or you need the money more quickly, consider a business line of credit or specialty business loan, such as an equipment financing loan, business auto loan or commercial real estate loan.

Frequently asked questions

There are two key differences between SBA 504 and SBA 7(a) loans: How they can be used and how they’re funded.

SBA 7(a) loans can be used for a wide variety of expenses, including working capital, to purchase supplies or fixtures, or to refinance business debt. SBA 504 loans, on the other hand, are designated for large equipment or facility purchases or upgrades. You cannot use an SBA loan for working capital or inventory.

Unlike SBA 7(a) loans, which are funded by a bank or credit union, funding for an SBA 504 loan comes from three sources: a Certified Development Company (40%), a bank or credit union (50%) and the small-business owner taking out the loan (10%). Under certain circumstances, business owners may need to put down as much as 20%.

It typically takes one to two months from the time you apply for an SBA 504 loan to when your loan is funded. That timeframe can stretch as long as six months for more complex projects, such as real estate purchases.