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SBA 504 Loan: What It Is and How to Get One

SBA 504 loans are an affordable option for funding equipment and real estate purchases — if you can qualify.
By Kelsey Sheehy, Randa Kriss
Last updated on October 10, 2023
Edited bySally Lauckner

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⏰ Estimated read time: 8 minutes

What is an SBA 504 loan?

An SBA 504 loan, or CDC/504 loan, is a small-business loan funded by Certified Development Companies and third-party lenders and backed by the U.S. Small Business Administration. These loans are designed to promote business growth and job creation through the purchase or upgrade of major fixed assets.

What can an SBA 504 loan be used for?

SBA 504 loans can be used to buy land, real estate, equipment, machinery, furniture or fixtures. They can also be used to build or upgrade facilities, including utilities, streets or parking lots. In specific scenarios, you can use a 504 loan to refinance debt or change ownership in your business.
You cannot, however, use an SBA 504 loan for working capital, to purchase inventory or to invest in real estate.

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How do SBA 504 loans work?

Unlike other types of SBA loans, 504 loans come from three different sources:
  • A third-party lender. This is typically a bank or credit union.
  • A Certified Development Company (CDC). CDCs are SBA-certified organizations that support economic development in their communities.
  • The borrower. This is the small-business owner taking out the loan.
In most cases, the third-party lender provides 50% of the loan, the CDC provides 40% and the borrower provides 10% in the form of a down payment, sometimes called an equity injection. The loan structure may change, however, based on certain circumstances.
Standard loan structure
New business OR limited/special purpose property
New business AND limited/special purpose property
Third-party lender
50%.
50%.
50%.
CDC
40%.
35%.
30%.
Borrower
10%.
15%.
20%.
According to the SBA, a new business refers to any company in operation for less than two years. A limited or special purpose property, on the other hand, is a property with “a unique physical design, special construction materials or a layout that restricts its utility to the use for which it was built.” Examples include bowling alleys, farms, gas stations, hotels, theaters and wineries, among others.
Regardless of the specific structure, the SBA provides a 100% guarantee on the CDC portion of all 504 loans.
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Max loan amount

$250,000

Max loan amount

$250,000

Max loan amount

$500,000

Min. credit score

625

Min. credit score

625

Min. credit score

660

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SBA 504 loan features

SBA 504 loans offer long-term, fixed-rate financing of up to $5 million (up to $5.5 million for select projects). Your loan amount, interest rates and repayment terms will vary based on your individual business, as well as the CDC and bank you work with.
Loan amount
$25,000 to $5 million. Energy public policy projects and small manufacturers may be eligible for up to $5.5 million.
Repayment terms
10, 20 or 25 years, based on the remaining useful life of the property being financed.
Interest rates
Rates are tied to the 10-year U.S. Treasury notes and are typically around 5% to 7% of the amount financed.
Collateral
The equipment or property being financed serves as collateral. In some cases, borrowers may be asked to provide additional collateral.
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.
Funding speed
Varies, but generally ranges between 30 and 90 days.
For 504 loans of all sizes, the SBA will require you to take out hazard insurance on what is being financed by the loan. You’ll also be required to sign a personal guarantee stating that you’ll repay the business’s debt in the case of default.

SBA 504 loan requirements

To qualify for an SBA 504 loan, you’ll need to meet general SBA loan requirements, criteria specific to the 504 loan program, as well as any additional requirements from your lender.
Standard SBA loan requirements include:
  • Must be a for-profit business operating in the U.S.
  • Must be a small business, as defined by the SBA.
  • Must have sought out other forms of financing before turning to an SBA loan.
  • Must be able to demonstrate the need for a loan and show the business purpose for which you’ll use the funds.
  • Cannot be delinquent on any government loans, including federal student loans.
  • Must be able to show your ability to repay the loan.
SBA 504 loan requirements include:
  • Net worth of less than $15 million.
  • Average net income of less than $5 million for the two years prior to the application.
  • You must be financing a major fixed asset purchase, upgrade or other eligible use case.
  • Your project must create or continue a certain number of jobs or meet other public policy goals.
Nonprofit organizations, life insurance companies, private clubs and businesses that primarily engage in lending, lobbying or legal gambling are not eligible to receive an SBA 504 loan.
Your CDC and bank lender will have specific criteria that you’ll need to meet as well. These criteria can vary, but lenders will generally want to see good credit and strong revenue.

How to get an SBA 504 loan

1. Find a lender

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, they’ll work with you to confirm that you’re a good candidate for a 504 loan and help you find a third-party lender.

2. Gather project information

Next, you’ll need to prepare information about the major fixed asset you’re going to purchase or upgrade. You may need to get quotes from a vendor or calculate overall project costs.
This will help determine how much financing you qualify for and how much of a down payment you need, as well as confirm that you meet all 504 loan requirements.

3. Complete SBA 504 loan application

The 504 loan process will require extensive documentation, but specifics may vary based on your lender. In general, you’ll be asked to provide:
  • Business and personal tax returns.
  • Business and personal financial statements e.g. balance sheet, income statements).
  • Business plan.
  • Accounts payable and receivable.
  • Contractor estimates (for construction loans).
  • Cost documentation (for equipment loans).
  • Existing debt schedule.
  • Cash flow analysis.
  • Description of owner/manager’s experience.
  • Description of additional collateral.
  • Real estate and/or equipment appraisal.
  • SBA Form 1244, Application for Section 504 loan.
  • SBA Form 413, Personal Financial Statement.
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. Here are a few alternatives to consider:
  • SBA Express loans.  If you need faster funding, these loans offer quicker approval times than 504 loans but have lower borrowing maximums (just $500,000). SBA Express loans may also have a less intensive application process compared to 504 loans, helping to speed up the process.
  • SBA 7(a) loans. You can’t use a 504 loan for working capital or to purchase inventory. So, if your expenses don’t qualify, an SBA 7(a) loan may be a better fit, provided you can meet the eligibility requirements. Learn more about how the SBA 7(a) loan compares to the 504 loan.
  • Online lenders. If you can’t qualify for an SBA loan, you might look into online lenders. These lenders are typically less strict about eligibility criteria than more traditional loan options. 

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