SBA 504 Loans: What Businesses Qualify and How to Apply

SBA CDC/504 loans fund real estate or equipment purchases or upgrades. They’re backed by the U.S. government.
Dec 2, 2021

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SBA 504 loans offer affordable financing for large equipment or real estate-related purchases. With their low interest rates, long terms and relatively small down payments, 504 loans are an ideal option for small-business owners who want to make big purchases — if they can qualify and afford to wait for funding.

Like most government small-business loans, SBA 504 loans have stringent requirements and a long application process. Closing can take several months.

Here's how SBA 504 loans work, who qualifies and how to apply.

What is an SBA 504 loan?

SBA 504 loans, also known as CDC/504 loans, are small-business loans offered by Certified Development Companies and backed by the federal government. SBA 504 loans are one of the three core U.S. Small Business Administration loan programs, which also include 7(a) loans and microloans.

SBA 504 loans provide 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

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 the 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 can't 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,” according to the SBA. These assets 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 can't be used as working capital or to purchase inventory, repay or refinance debt, or invest in rental real estate.

Next steps to getting an SBA loan: 

How do you get an SBA 504 loan?

To get an SBA 504 loan, you'll need to find a Certified Development Company. These nonprofit economic development organizations will process your application, coordinate your financing and submit the loan package to the SBA. You can find a list of CDCs on the SBA’s website.

Once you’ve identified a CDC, you’ll need the following documents to apply for an SBA 504 loan:

  • Business and personal tax returns for the last 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 isn't exhaustive, and the CDC and bank you work with may require additional documentation to process your 504 loan application.

If your application is approved, SBA 504 loans typically take one to two months to close. But closing can take longer for larger and more complex purchases.

Alternatives to an SBA 504 loan

SBA 504 loans are a great choice for funding major facility improvements or equipment purchases, but they don’t make sense for every business owner.

  • If you need faster funding: SBA Express loans offer quicker approval times than 504 loans but have lower borrowing maximums (just $500,000). If that amount isn’t enough for you, consider other fast business loans, like a business line of credit.

  • If your expenses don’t qualify: You can’t use a 504 loan for working capital or to purchase inventory. An SBA 7(a) loan may be a better fit in those instances, provided you can meet the eligibility requirements.

  • If your business can’t qualify: Online lenders are typically less strict about eligibility than government-backed loans. These lenders offer several options based on your business needs, including equipment financing, business auto loans and commercial real estate loans.

How Much Do You Need?

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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, purchases of supplies or fixtures and refinancing business debt. SBA 504 loans, on the other hand, are designated for large equipment or facility purchases or upgrades. You can't use an SBA 504 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 several months from the time you apply for an SBA 504 loan to when your loan is funded. That time frame can stretch as long as six months for more complex projects, such as real estate purchases.