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SBA 504 Loans

SBA Guaranteed Loans for Real Estate and Equipment

Are you an entrepreneur or a visionary with a goal in mind? Perhaps you want to purchase and repurpose an abandoned hospital, or maybe you hope to start up a restaurant. No matter what your vision is, you are going to need money. You must consider purchasing costs, soft fees, interest rates, insurances, equipment, renovations, and many other things.

Most likely, you’ll need to take out a loan to help get you started or to support you throughout the entire process of building your business. A popular loan program that Commercial Real Estate Loans. arranges for small business owners is the U.S. Small Business Administration (SBA) 504 Loan.

What is an SBA 504 Loan?

The SBA 504 loan program (Sometimes known as the SBA CDC/504 Loan Program) is a Small Business Administration-guaranteed loan of up to $5.5 million. It is designed for owner-occupied commercial real-estate and other qualified fixed assets, and geared as a commercial mortgage. The property must be more than 51% owner occupied.

SBA 504 Loans are comprised of two different funding sources at once. One mortgage of up to 50% is backed by a bank or another financial lender that can cover up to half the total purchase price. Another 40% is supplied by a certified development company or CDC as a second mortgage. The borrower is responsible for the final 10% as a down payment.

Taking on a loan that involves a third party may seem intimidating at first, but the SBA holds strict CDC eligibility requirements for the program. CDCs participating in the program must meet the following criteria in order to qualify:

  • Must be a Non-Profit Organization (NPO) in good standing

  • Must have a minimum of 25 members that represent:

    • Government Organizations recognized by the SBA for economic development in the area of operation

    • Financial institutions that support long-term commercial fixed financing for:

      • The area of operation

      • The area of operation’s community establishments devoted to economic growth, such as foundations, chambers of commerce and universities

      • Local businesses within the area of operations

  • Must have a board of directors that not only meet appropriate requirements, but are also selected from the membership, representing a minimum of three out of four of the membership groups.

  • The CDC must have professional, full-time management that includes an executive director who has undergone the approved training and has knowledgeable experience with the SBA 504 loan program.

  • Every fiscal year, CDCs need to meet a requirement of a lending activity with a minimum of two approved 504 loans. The CDC's portfolio must also reflect that through the SBA 504 loan funding fulfilled, a rate of one job opportunity for every $65,000 was averaged.

  • All applications must have the CDC’s Board of Directors approve an operating budget that is coupled with a plan to meet operations within that budget. It cannot be specialized to a specific industry, but must be general in nature.

  • Upon application approval, there must be proof via demonstration of satisfying operating criteria and certification that is highlighted in the Code of Federal Regulations (CFR).

  • At the end of a mandatory 2-year probation period for CDCs certified for less than 2 years, CDCs can be approved through petitions they willingly submit to either extend the probation period by one year or be given permanent status. If the CDC’s petition is denied or if they fail to file one, the CDC will be removed from the SBA 504 program.

  • Any money that is funded by a CDC that is being removed from the 504 program will be transferred to either the SBA, another certified CDC, or an outside service that has been approved by the SBA.

On top of these strict eligibility guidelines for the CDCs in the program, the actual lenders must make it through the Preferred Lenders Program (PLP). The PLP allows the SBA to carefully select qualified lenders to make final credit decisions, to service loans, and to perform liquidation requirements. Lenders are continuously checked for eligibility criteria. The verdict to elect a lender into the PLP is made based on three important aspects:

  1. The lender has the ability to handle all financial elements regarding an SBA loan.

  2. The lender can both develop and analyze complete loan packages.

  3. The lender’s performance history with the SBA is satisfactory.

Rest assured that only the highest quality lenders and CDCs are eligible to take part in the SBA 504 Loan program. With higher leverage than conventional commercial real estate loans, the SBA 504 loan may be exactly what you need to make your vision a reality!

How to Qualify for an SBA 504 Loan

In order to qualify for the SBA 504 loan, businesses must also meet a strict set of eligibility requirements that include: 

  • Must be a For-Profit entity

  • Must be able to pay your loan agreement in a time frame that is based on the projections of the company’s operating cash flow

  • Must no have funds available from other sources

  • Business must be located in and operate within the United States and/or United States properties

  • Must not invest or speculate, or be in the business of owning rental real estate for profit.

  • Must have a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.

  • Must have a feasible business strategy

  • Proceeds must be used for purposes approved by the SBA which include:

    • Purchasing land or existing buildings

    • Improvements to property such as utilities, parking lots, street enhancements and landscaping

    • Constructing new facilities or modernizing/renovating existing facilities

    • Buying machinery and equipment for long-term use

  • Must not use proceeds for any of the following:

    • Operating capital or inventory

    • Funding for other debts (refinancing, consolidating, or repaying)

    • Considering or capitalizing in rental real estate

  • Your business must be an eligible business as determined by the SBA including (but not limited to):

In addition, prospective borrower applicants must:

  • Have been in business for a minimum of two years

  • Have a credit score of at least 680

  • Be looking to finance at least $30,000

  • Have a profitable business with a minimum revenue of $50,000 over the previous 12 months

  • Be able to prove the need of financial support (Have a palpable net worth that is less than $15 million—in the past two years, your average net income after taxes must be less than $5 million)

  • Show proof of good character with a “Statement of Personal History,” which is required to prove your principles of historically good conduct with the disposition and capability to pay your debts; you also should not have had any trouble with the law.

SBA 504 Application Process

SBA 504 real estate

 The SBA 504 loan application process is not as tedious as one might imagine. The checklist below highlights everything that you need to do in order to apply:

  1. Complete an SBA 504 loan application form 1244.

  2. In order for the SBA to determine your eligibility, both a Statement of Personal history (form 912) and a Personal Financial Statement (form 413) must be filled out.

  3. Two Business Financial Statements are required in order to support your application and demonstrate your ability to repay the loan. These are:

    • Profit and loss (P&L) statement that is 90-days current with previous three years of supplementary schedules

    • Projected financial states that outline a detailed one-year income projection with a written explanation on how the projection is achievable

  4. Create a list with contact information for applicable affiliates and subsidiaries with important influences and relations.

  5. Provide your original business certificate or license, or, use your corporate seal to stamp your application if your business is a corporation.

  6. If you have applied for loans before, include records of those applications.

  7. Gather and submit business and personal federal income tax returns that have been signed in the previous three years.

  8. Each principal applicant needs to produce a personal resume.

  9. Have a written history of challenges the business has faced, why the SBA loan is needed, and how it can help.

  10. Finally, provide a written history of challenges the business has faced, why the SBA loan is needed, and how it can help.

If the loan proceeds are being used to purchase an existing business, you will also need:

  1. P&L statement of the business you are buying and an up to date balance sheet.

  2. Income tax returns of the business you are purchasing dating back to two years

  3. Terms of sale and the proposed bill.

  4. A list that includes schedule of inventory, furniture, fixtures, machinery and equipment, and asking price.

Once this is all completed and submitted to the SBA, it is solely a matter of awaiting their verdict. 

SBA 504 Loan Terms 

  • Loan Amount: Up to $5 million ($5.5 for manufacturers)

  • Loan Term: 20 to 25 years (fully amortizing)

  • Rates: Prime + 1.25% - 2.75% (Fixed)

  • Loan to Value: Up to 90% LTV (80% on hotels and motels)

  • DSCR: Minimum 1.20x DSCR on existing cash flow

  • Collateral: The SBA 504 loan uses the project assets being financed as collateral. The principal owners are also required to produce personal guarantees.

  • Fees: Typically 3% of the debenture and may be financed with the loan.

SBA 504 Loan Amount Determination Factors:

SBA 504 loan amounts are formulated by the nature of how funds will be utilized:

  • Job Creation: In this goal, the maximum debenture allowed is $5 million designated for creating jobs and positively developing the community. To be exact, every $65,000 must retain or create a single job. For small manufacturers, it is every $100,000.

  • Public Policy: Small manufacturers can be approved for up to $5.5 million; everyone else has the same standard $5 million. Like the Job Creation category, there is a goal to meet: reducing energy or using alternative fuels. Some examples include:

    • Outreach of minority business growth

    • Rural development

    • Adaptive modifications due to cutback in federal budget

    • Business district renewal

    • Productivity and competitive increase

    • Increase of small business apprehensions owned and managed by veterans, particularly service-disabled veterans and women

    • Export expansion

    • Abiding by federally mandated standards or policies for restructuring

  • Small Manufacturing: As stated previously, small manufacturers get a capped debenture of $5.5 million for a commercial loan. These small manufacturers must meet an SBA policy goal and create a job for every $1,000. Examples of small manufacturers include (but are not limited to):

    • Apparel manufacturing

    • Leather and allied product manufacturing

    • Textile and Textile Product mills

    • Petroleum and coal products manufacturing

    • Wood product manufacturing

    • Printing and related support activities

    • Beverage and tobacco product manufacturing

    • Paper manufacturing

    • Plastics and rubber products manufacturing

    • Food manufacturing

    • Primary metal manufacturing

    • Transportation equipment manufacturing

    • Chemical manufacturing

For further classification of small manufacturers, more information can be found in sectors 31-33 of the North American Industrial Classification System (NAICS).

Usage of SBA 504 Loan Proceeds:

According to the Small Business Administration, an SBA 504 Loan package may be used for the following purposes: 

  • The purchase of real estate, including land and existing buildings

  • The purchase of improvements, including parking lots, grading, street improvements, utilities, and landscaping

  • The construction of new facilities or renovation or modernization of existing facilities (including conversions)

  • The purchase of machinery and equipment to be use in the long term

Loan proceeds must not be used for any of the following:

  • Inventory or working capital

  • Repaying, refinancing, or consolidating an existing debt

  • Rental real estate investment or speculation

Over the years, Commercial Real Estate Loans. has advised developers on which loan package is best for the project at hand and has thus accumulated the experience and skills to help developers navigate the requirements set by the SBA. 

SBA 504 Loan Interest Rate Breakdown

SBA 504 rates can be broken down into the base Treasury rate, the fixed interest rate, and additional fees, like so:

10-year 504 loan interest rates include:

  • A five-year Treasury rate

  • Fixed rate of 0.38%

  • Ongoing fees of approximately 1.7%

20-year 504 loan interest rates include:

  • A 10-year Treasury rate

  • Fixed rate of 0.48%

  • Ongoing fees of approximately 1.7%


SBA 504 interest rates can vary based on the market. However, the rates are locked in with your contract and won’t change during the term, even if the market rates do. Keep in mind, the third-party portion of the loan is not required to be fixed, as the institution can have a variable rate, balloon payment, and more.

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Commercial Real Estate Loans. is the partner you need to help you through your next commercial real estate transaction. We have the experience and expertise to give your small business more financing options.