What is an SBA 504 Loan?
Learn what SBA 504 loans are, understand their unique two-loan structure, and see when the 504 program makes sense for real estate and equipment purchases.
The SBA 504 loan program provides long-term, fixed-rate financing for major fixed assets like commercial real estate and heavy equipment. Unlike the flexible 7(a) program, 504 loans are specifically designed to promote economic development through capital-intensive projects.
The 504 Loan Structure
SBA 504 loans have a unique structure involving three parties:
- Bank loan (50%): A conventional loan from a bank covering up to 50% of the project cost
- CDC loan (40%): A second loan from a Certified Development Company, backed 100% by the SBA, covering up to 40% of the project cost
- Borrower equity (10%): You contribute at least 10% as a down payment (15% for new businesses or special-purpose properties)
What is a CDC?
A Certified Development Company (CDC) is a nonprofit organization certified by the SBA to provide 504 loans. CDCs focus on economic development and work with banks to structure 504 financing.
SBA 504 Loan Terms
Key terms for SBA 504 loans:
| Feature | Details |
|---|---|
| Maximum CDC loan | $5.5 million (up to $5 million SBA debenture) |
| Total project size | No maximum (CDC portion capped) |
| Real estate terms | 20 or 25 years |
| Equipment terms | 10 years |
| Interest rate | Fixed rate, based on 10-year Treasury + spread |
| Down payment | 10-20% depending on business age and property type |
Eligible Uses
SBA 504 loans can only be used for:
- Purchasing land and existing buildings
- Constructing new buildings or renovating existing facilities
- Purchasing heavy machinery and equipment with 10+ year useful life
- Refinancing debt from eligible 504 project costs
- Improvement of land, streets, utilities, parking
Job Creation Requirements
The 504 program has economic development goals. Generally, you must create or retain one job for every $90,000 of SBA debenture funding ($130,000 for small manufacturers).
Some projects qualify through meeting community development or public policy goals instead of job creation.
SBA 504 vs. SBA 7(a)
The key differences between these programs:
- 504 advantage: Lower down payment (10% vs. often 20%), longer terms, fixed interest rates
- 504 limitation: Can only be used for fixed assets, not working capital
- 7(a) advantage: Flexible use of funds, simpler structure
- 7(a) limitation: May require higher down payment, variable rates possible
For major real estate purchases, 504 loans often provide the best terms. The lower down payment requirement alone can preserve significant working capital.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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