Small businesses need funding at various points in their lifecycle to continue to reach their goals. The Small Business Administration, or SBA, employs multiple initiatives to help business owners like you receive capital, including the 504 loan program. Whether you’re planning a startup and need to finance your first space or you run an established business and you’re looking to grow, this program can be a great option for you.

About SBA 504 Loans

For many owners, small business loans can be difficult to obtain. Banks have strict criteria you must meet, and other lenders tend to offer higher rates and fees, which can make them cost-prohibitive. Fortunately, the Small Business Administration wants to make it easier for you to get the funds you need to advance your business.

Like most SBA loans, the 504 program is focused on building up America’s small business infrastructure. They accomplish this by helping owners finance their business in exchange for stimulating local economies and creating jobs. In fact, the SBA has attributed over 2 million jobs to their loan initiatives. It is considered a win-win-win for everyone involved; owners get the funding they need, more jobs are available for workers and the economy grows.

There are specific requirements you need to meet, and the structure of these loans can be difficult to understand, but we’ll give you everything you need to know to evaluate and apply for an SBA 504 loan.

How SBA 504 Loans Work

It’s important to understand how 504 loans differ from other SBA programs before applying. Instead of acting as a guarantor to a portion of the financing—as seen in their 7(a) initiative that includes Express and Veterans Advantage loans—the SBA acts to entice traditional lenders to accept your loan by offering to cover a chunk—or debenture—of the loan amount through their partners, Certified Development Companies (CDCs).

Certified Development Companies

A CDC is a nonprofit corporation that’s regulated and certified by the Small Business Administration. They work with lenders to facilitate 504 loans under the structure the SBA provides. There are currently over 250 of them working nationwide. Each CDC services a specific geographical territory in which they work with businesses seeking funding in that area.

Find assistance applying for an SBA 504 loan in your area with this handy CDC search tool.

SBA 504 Loan Structure

The structure of 504 loans is complicated. The loan is serviced by two parties. If approved, you’ll essentially be getting two separate loans: one from a traditional lender, or bank, and one from the CDC backed by the SBA. Together, with a modest down payment, the two loans make up the total financing you need to get your project started.

The structure is set out as follows:

  • Traditional lender: 50 percent
  • CDC: 40 percent
  • Down payment: 10 percent (or more depending on certain factors)

There are some exceptions, however. CDCs are only allowed to contribute up to $5 million ($5.5 million for some small manufacturers and businesses qualifying for the SBA Green Energy Program) in funding for SBA loans. Since SBA restrictions don’t bind lenders, they can provide 2-3 times that amount, thus throwing off those percentages. Down payments could be raised to 15 percent based on whether your business is a startup or the real estate you’re financing is considered a “special use property” by the SBA.

Projects 504 Loans Are Used For

Unlike some 7(a) loans, the 504 program is more specific in terms of what you can use the funding for. In general, the money must be allocated towards expanding your business. Expansion means more jobs, which is the heart of what the 504 program is all about. Examples of qualifying uses include fixed assets, such as commercial real estate and equipment for your business, as well as necessary remodeling and upgrades that will help your business grow.

(Note: If using the program to finance real estate, you must occupy 51 percent of the space for existing structures and 60 percent for new construction to qualify. This number will rise depending on the terms laid out in the loan agreement.)

In the last few years the SBA has opened these loans up to debt refinancing, but there are restrictions on what type of debt qualifies under the 504 program. If the money is used for under 50 percent of the total cost of a program-approved project, you may be eligible if your business meets other criteria.

These loans cannot be used for working capital, inventory or for purchasing rental real estate. If your business has any of these needs, Fast Capital 360 can help match you with the right program and lender.

Eligibility and Requirements for SBA 504 Loans

There are certain requirements that are generally needed to acquire any SBA loan, as well as some specific to the 504 program. Remember that these requirements are for the loan provided by the CDC only. The lender that is working with them to fund your project may have additional criteria—including credit and annual revenue limits—you must hit.

General Business Prerequisites

First, your business must be conducted for-profit within the United States and also fall under their size standards guidelines to qualify for any SBA loans. As an owner, you must have shown that you require funding and have exhausted alternative financing options, including investing your own time and money into the business. Most types of businesses can be approved, but companies that are engaged in lending practices, have pyramid sales structures and promote gambling or illegal activities are ineligible.

504-specific Requirements

If your business meets the above qualifications, you must also have a sound plan in place that proves the funding is a smart investment for both you and the SBA. You must demonstrate that a loan will help you grow and create jobs, as there are strict numbers you must be able to hit for a CDC to commit its money to your project.

If approved, your business must create 1 job for every $65,000 that is guaranteed by the SBA debenture on the CDC loan (this number jumps to $100,000 for qualifying small manufacturers). Seventy-five percent of these jobs must be kept within your community, meaning you cannot outsource these jobs and must promote local economic growth.

There are, however, a few exceptions to this rule. Your application will still be considered if you can prove that jobs will be lost without receiving the funds. The severity of this loss must be high enough to match the number of jobs the 504 program would otherwise gain out of that money, making their investment in retaining those jobs worth it.

Also, you may circumvent the job-creation requirements if the funding will help your business meet other community development and public policy goals, including:

  • Improving and diversifying the local economy
  • Promoting the development of other local businesses
  • Expanding opportunities for women, minorities and veterans
  • Upgrading or remodeling facilities to meet health, safety and environmental regulations
  • And others

You must provide the lender and the CDC with a strong proposal on how you will reach these goals to be considered for the program. Failure to show a plan that will result in a win-win for the SBA and your business will have your application rejected.

Terms, Rates and Fees for SBA 504 Loans

The purpose of all SBA loan programs is to provide businesses like yours with access to funding under reasonable terms. To accomplish this, they extend financing with longer payment lengths and lower rates than you’ll find with alternative lenders, keeping money in your pocket and thus stimulating the economy.

Term Lengths

Based on what your project is for, the repayment length you will receive varies between the bank and CDC portion of your 504 loan.


LenderReal estate (incl. remodels and upgrades)Equipment financing
CDC20 years10 years
Bank10 years7 years


(Note: Financing terms for equipment can vary based on the length of time the lender determines the equipment will retain worth. For example, a piece of computer equipment that’ll be obsolete in 5 years will carry a repayment term no longer than that period.)

By having longer term lengths, SBA 504 loans allow you to spread out and lower payments, making them a desirable option for larger and more expensive projects.

Interest Rates and Fees

Like the repayment lengths, interest rates and fees are different within the two individual parts of your loan. Banks can set variable or fixed rates for the borrower and will impose their standard fees. Since they’re only responsible for financing a percentage of your project, it may be easier to negotiate a lower interest rate with them than it would normally be. You can expect a rate somewhere in the range of 3-5 percent based on your creditworthiness and the lender.  

The CDC always provides fixed rates with a fully-amortized structure to help keep your financial commitments consistent. The way that they’re calculated changes monthly based on the U.S. Treasury rates, but once you sign the paperwork for the loan, you’re locked into whatever the percentage was at that time. The CDC then imposes an additional rate (less than half of 1 percent) on top of the Treasury rate, bringing the total interest to around 3-4 percent, generally lower than what you would find with an alternative lender.

There are a few fees that you will want to consider on the SBA-backed portion of your loan. The price of some of these fees may vary by borrower and others have a cap that can change. There are 3 main fees included in the CDC portion of your loan:

  • SBA guarantee fee
  • Servicing agent fee
  • CDC fee

Prepayment fees can also be imposed if the loan is paid off within the first half of the term, declining by 10 percent each year. You can also expect processing, appraisal, legal, underwriting and some other fees usually standard in small business loans. Check in with your local CDC to find out what the current rates are for these fees, so you have a good understanding before you apply.

Applying for an SBA 504 Loan

Once you have checked your eligibility and determined that the 504 loan program is the right fit for your business’s needs, it’s time to put together what you need to apply.

Most importantly, you have to put together the plan you need to prove to the SBA that they should invest in your business. This document should include exactly how you will use the funding, why it’s necessary to your business and how it will meet the job-creation or community development goals the 504 program wants to reach.

Once you have your plan in place, you’ll send it with other financial documentation both the bank lender and SBA will use to judge your business’s creditworthiness. These include:

  • Personal & Business Tax Returns
  • Personal Financial Statements (required from each individual owning 20 percent or more of the company)
  • Profit and Loss Statement
  • Balance Sheet
  • Collateral (the equipment or real estate that is financed in the loan is usually enough, but more collateral is sometimes required)

You’ll also want to consider how to cover the 10 percent down payment required to secure the loan. You can use personal savings, your 401(k), or even a private loan, barring your personal finances are separated and you use a source of income outside of the business to pay it.

When you have everything together, send all of the documentation to your bank and local CDC, who will share it with the SBA and help facilitate your application. If you are approved, you will then negotiate any terms and come to an agreement on both parts of the loan. If not, there are still other ways to get funding, so explore all of the options available to get your business what it needs to expand and grow.

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