SBA 504 Loans: The Ultimate Guide

An SBA 504 loan, sometimes called an SBA CDC/504 loan, is a business loan guaranteed by the U.S. Small Business Administration that provides long-term financing for the purchase of real estate, equipment, and other fixed assets. Unlike other types of SBA loans, three parties are involved in issuing an SBA 504 loan—the borrower, the bank, and the SBA-approved certified development company (CDC). 

This being said, although the structure of this type of SBA loan may be more complex and the funds can only be used for very specific purposes, it’s an extremely competitive financing solution for businesses looking to purchase or update real estate, equipment or machinery. For this reason, SBA 504 loans are often equated as SBA commercial real estate loans.

Is an SBA 504 loan right for your business? We’re here to help you find out.

In this guide, we’ll break down everything you need to know about SBA 504 loans—including rates, requirements, and how to apply.

Before we dive into the details, you can use the information below to get a better sense of SBA 504 loans, at a glance.

• Eligible loan purpose: Purchase of major fixed assets like land, buildings, equipment, and machinery
• Loan amount: Generally up to $5 million on CDC portion, up to $5.5 million for specific businesses
• Interest rates: Fixed, typically about 5% to 6% for CDC portion; bank portion will vary
• Terms: Up to 25 years
• Down payment: Usually about 10% of the loan amount
• Collateral: Project assets being financed are often used as collateral; personal guarantees for business owners of 20% or more are required
• Fees: Vary; can include SBA and CDC fees, as well as bank fees

With this overview in mind, let’s break down exactly how SBA 504 loans work. As we mentioned above, these loans are structured quite differently in comparison to most SBA loans. Whereas other loans are typically issued by an SBA lending partner, like a bank, and partially guaranteed by the SBA, 504 loans consist of three parts (as shown in the image below):

1. Bank loan (50%): A bank or other direct lender extends 50% of the total loan amount.
2. CDC loan (40%): An SBA-approved certified development company (CDC) extends 40% of the total loan amount. CDCs are nonprofit corporations that promote economic development in their communities. Typically, the bank lender you work with can help you find a CDC in your area.
3. Down payment (10%): This loan requires a 10% down payment from the borrower. Startups and special use properties may have to put more than 10% down on their SBA 504 loan.

With this unique structure, it’s important to recognize that although the bank and CDC will work closely together in issuing your SBA 504 loan, the SBA itself only oversees and regulates the CDC component of the loan.

Therefore, many of the terms and rates you’ll see in relation to this SBA loan program (which we’ll discuss throughout this guide) refer specifically to the CDC portion of the loan. Banks, on the other hand, are free to set their own eligibility requirements and terms for the bank portion of the loan.

To get a better understanding of the structure of an SBA 504 loan, let’s walk through a brief example:

Your business is looking to purchase a building to create a new retail space. Your costs for this project will include:

• The building purchase
• Renovation of the space
• Furniture and equipment for the store
• Additional soft costs, i.e. anything not related to the physical construction

Considering all of these elements, the project will cost $2 million. Therefore, if you were to get an SBA 504 loan to cover this project, the structure might look like this:

1. Bank loan: $1 million, obtained from an SBA lender covering up to 50% of the total cost
2. CDC loan: $800,000, obtained from a CDC with SBA-guaranteed portion, covering up to 40% of the total cost
3. Down payment from borrower: $200,000 contribution from you, the borrower, covering the final 10% of the total cost

Once again, as we mentioned above, although the CDC portion will be governed by the SBA’s restrictions in terms of SBA 504 loan rates, amounts, and terms, the same is not true for the bank portion. The lending bank will be able to set these terms at their own discretion.

Now that we’ve reviewed that example and the caveats that come along with the SBA 504 loan program, let’s discuss the typical features of these loans, starting with loan amount.

The maximum loan size on the CDC portion of an SBA 504 loan is $5 million, extending up to $5.5 million for green energy companies and manufacturing businesses. The bank portion of the loan, however, can be double, or even triple, the size of the CDC portion, bringing total possible funding to $20 million or even higher.

Of course, as we just discussed, you, as the borrower will be required to put down 10% of the loan amount (a larger down payment is usually required for startups or special use properties). This being said, however, this SBA loan down payment is about half of what banks typically require for conventional loans. 

On the whole, the down payment for your SBA 504 loan can come out of personal savings, other personal assets, and even retirement money in some circumstances. You can also use a personal loan as the down payment if you have an income stream independent of your business to pay back the personal loan. In general, other business debt can’t be used for the down payment, unless payments on the other loan aren’t due until after the term of the 504 loan.

Overall, one of the biggest benefits of SBA 504 loans is low interest rates—much lower than you’d find with a private lender or hard money lender. 

This being said, SBA 504 loan rates are composed of two different interest rates—the rate on the CDC portion of the loan and the rate on the bank portion of the loan. The SBA sets standard, fixed rates for the CDC portion of the loan.

The way these SBA loan rates are calculated is actually pretty complicated. In short, the interest rates on the CDC portion of the loan are based on the current rate for U.S. Treasury bonds—and to calculate those rates, you have to add a spread for investor returns, as well as fees from the CDC and SBA.

All in all, however, rates on the CDC portion typically fall between 3% to 6% (below market rate for a standard bank loan) and are fixed for the full term of your loan.

With the bank portion of the loan, on the other hand, the interest rate you receive will depend on the individual lender and your business’s qualifications. Typically, rates on the bank portion aren’t as low as the CDC rates, and can either be fixed or variable. Generally, these rates don’t exceed 10% and are often equivalent to the rates you’d expect to receive on a commercial real estate loan.

Finally, in addition to affordable SBA 504 loan rates, another top benefit of this type of financing is long repayment terms. 

Repayment terms on the SBA 504 loan program start at 10 years and extend to 25 years—depending on what you’re using the loan for:

• Purchasing machinery or equipment: 10 years, monthly repayment
• Purchasing or converting land or buildings: 20 or 25 years; monthly repayment

At this point, you should have a solid understanding of how the SBA 504 loan program works and the rates, terms, and amounts you can expect to receive with this financing.

Next, let’s break down the SBA 504 loan requirements, including eligible loan uses, general SBA loan qualifications, and business loan requirements specific to this program.

First and foremost, in order to qualify for the SBA 504 loan program, you’ll have to show that you intend to use the financing for an eligible purpose. As we explained briefly above, on the whole, SBA 504 loans are designed for the purchase of major fixed assets. 

More specifically, however, this includes:

• Purchasing equipment or machinery
• Purchasing existing buildings
• Purchasing of land and land improvements (e.g. street grading, utilities, parking lots, etc.)
• Building new facilities
• Renovating, remodeling, or converting existing facilities
• Refinancing existing debt that’s connected with an expansion of your business through new or renovated facilities or equipment

With a few small exceptions, you cannot use a 504 loan as a working capital loan.

Overall, the SBA gets pretty specific on the rules for eligible loan uses. 

For example, if you’re planning to use a SBA 504 loan to purchase, renovate, or convert an existing building, it must be at least 51% owner-occupied. Therefore, if you were  acquiring a building with five office spaces, you would be able to rent out two of those spaces while occupying the remaining three spaces. New buildings must be at least 60% owner-occupied to begin with, increasing to 80% owner occupancy within 10 years.

Similarly, if you’re purchasing equipment or machinery with an SBA 504 loan, it must have an estimated life of at least 10 years. The equipment can be new or used, but this useful life requirement prevents you, for example, from using a 504 loan to buy office computers.

With this in mind, before you evaluate your business’s other qualifications for a 504 loan, you’ll want to make sure that your intended use meets these guidelines.

Once you’ve determined that you meet the loan purpose eligibility requirement, you’ll need to meet additional SBA loan requirements as a business. As we’ll discuss shortly, although there are some qualifications that are specific to the SBA 504 loan program, you’ll need to meet the following general requirements as well:

• Be a for profit business in an eligible industry, operating in the U.S.
• Have invested some of your own time and money into your business
• Have exhausted other financing options
• Show that you have “good character”
• Meet the SBA’s definition of a small business, which varies by industry
• Not be delinquent on other government loans
• Have strong personal credit, as well as business financials

Overall, both the CDC and the bank lender will be able to impose their own SBA 504 loan requirements to determine whether or not your business is eligible. For the best chance of success, therefore, you’ll want to have at least a few years in business, a credit score of 650 or higher, minimal existing debt, and no red flags, such as bankruptcies in your recent financial history.

Due to the specialized nature of the SBA 504 loan program, there are additional requirements that you’ll need to meet for this type of financing. 

These requirements include:

• Have a tangible net worth of no more than $15 million and an average net income of $5 million or less after federal income taxes for the two years prior to application
• Meet owner occupancy requirements
• Project must create or retain jobs or promote other public policy goals

Compared to the general SBA 504 loan requirements, the owner occupancy and public policy requirements make this business loan application and qualification process much more complex for many businesses. 

As we mentioned above, the owner occupancy requirement states that if you’re using a SBA 504 loan to buy or renovate buildings, you must occupy at least 51% of the property. The remaining can be leased out to third parties. For new construction, the applicant must occupy at least 60% of the property.

The jobs requirement, on the other hand, stems from the SBA’s desire to fund businesses that are contributing to the economy. The current jobs requirement is that the financing your business receives must create or retain at least one job for every $75,000 of the loan ($120,000 for small manufacturers). 

This being said, the jobs you create don’t necessarily have to be at your own business, but 75% of the jobs must be kept within the community. You can use job retention to satisfy this requirement only if you can show that jobs would be lost to the community if the project weren’t completed.

To this point, SBA director of rural affairs Michelle Christian says, 

“504 loan applications ask you to estimate the number of jobs you will create and retain with the money you hope to borrow. While these are an estimate, they need to be realistic. Also, the focus is on jobs created rather than jobs retained. Jobs created are easier to explain. That being said, even if the project will not create or retain the required jobs, a small business owner may still be able to get the 504 loan.”

If you don’t think you’ll be able to meet the jobs requirement, you can still qualify for an SBA 504 loan if you can satisfy another community development or public policy goal. There are a variety of goals that fall under this requirement, but some of the most notable include:

• Improving, diversifying, or stabilizing the local economy
• Stimulating other business development
• Bringing new income into the community
• Assisting manufacturing firms
• Revitalizing a business district of a community with a written revitalization or redevelopment plan
• Expansion of exports
• Expansion of small business opportunities for women, veterans, and people of color

On the whole, if you’re looking to apply for a SBA 504 loan, you should be able to fall into one of the broader community development or public policy categories, such as improving the local economy or stimulating new income and investment. 

Along these lines, however, it’s important that you can succinctly state how you meet the job requirements or one of these public policy goals, and back up your claim with appropriate documentation. For example, you might need to include a business plan for funding or personnel records to make your case to the SBA.

So, if you think an SBA 504 loan is right for your business, you’ll want to find a lender to start the application process. Of course, as we’ve discussed at length with regard to this program, this will involve working with a bank or other SBA lending partner, as well as a CDC.

Overall, many national, regional, and community banks participate in the SBA 504 loan program. Therefore, you might start by asking the bank that you already use for business banking if they offer SBA 504 loans. On the other hand, if your bank doesn’t offer this type of SBA loan, or you simply want to explore your other options, you can refer to our list of the best banks for business loans.

Once you find a bank that can help you, they should be able to recommend a CDC that they regularly work with. Alternatively, you can also start by finding the CDC. The SBA’s website has a CDC finder tool, and the CDC should be able to direct you to a local bank. 

This being said, once you find a CDC and a bank, you’ll be able to start the application process. Although the process is typically extensive for any type of SBA loan, you’ll find that the 504 loan application, in particular, is especially lengthy.

In general, you can expect to be asked for the following documentation with your SBA loan application:

• Business plan
• Personal and business income tax returns
• Business financial statements
• Business debt schedule
• Bank statements
• Collateral
• Personal guarantee
• Legal documents

Therefore, it will be helpful to be as organized as possible during the process and keep a regular communication line open with the bank lender and the CDC. 

At the end of the day, an SBA 504 loan is perfect for purchasing fixed assets and for making large investments in your business’s future. The 10% down payment is low compared to conventional loans—plus, 504 loans come with some of the lowest interest rates around.

As we’ve discussed, however, although the SBA 504 loan program is a worthwhile option, there are multiple working parts to this type of loan. You’ll need to take the time and attention required to find the right bank partner, CDC, and ultimately, complete the lengthy and detailed application process.

To this point, if you need faster funding or don’t think you can qualify for an SBA 504 loan, you’ll want to explore alternative sources of financing—like short-term loans, business lines of credit, or other types of business loans.