SBA 504 Loan: What Is It and How Does It Work?
The U.S. Small Business Administration (SBA) has multiple funding options for owners of small and medium businesses. Owners who are looking for significant funding with long-term and fixed-rate financing may benefit from an SBA 504 loan, especially if the loan will go toward substantial business growth or job creation.
In this post, we’ll discuss what SBA 504 loans are, how they work, what they can and can’t be used for and how to apply.
SBA 504 loans at a glance
| What it is | Loans offering long-term, fixed-rate financing for major fixed assets that can promote job creation or business growth |
| Loan amounts | $25,000 to $5.5 million |
| Interest rates | Based on the current market rate for 10-year U.S. Treasury notes |
| Fees | Fees vary, but currently include the following for the 2024 fiscal year:
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| Down payment | A 10% down payment is often required, though higher amounts may be required depending on credit history, revenue history or project type |
| Collateral | Typically none required, as the special project funded can act as collateral |
| Requirements |
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| Funding speed | Varies, but often takes 30 to 90 days on average |
How SBA 504 loans work
SBA 504 loans are fixed rate loans that may have 10-, 20- or 25-year repayment terms. They’re used to finance large purchases that can facilitate job creation or business growth, such as expensive machinery or new buildings. They’re guaranteed by the SBA, and because they’re often used to finance large purchases that can act as collateral themselves, additional collateral typically isn’t required.
Unlike other types of SBA loans, SBA 504 loans are funded by three different parties:
- The borrower. Borrowers are typically required to make a down payment of at least 10%, depending on factors like the loan balance, business revenue history and business credit scores. In some cases, borrowers may be asked to put up to 20% down.
- Certified Development Companies (CDCs). These lenders typically provide 40% of the loan’s full balance, which is guaranteed by the SBA. Business owners start the application process by applying to a participating CDC.
- A third-party lender. Often a bank or a credit union, this lender typically provides 50% of the funding.
Most SBA 504 loan limits fall at $5 million, though some programs may qualify for SBA 504 loan maximums of $5.5 million.
Requirements to get an SBA 504 loan
There are several requirements to keep in mind when deciding if an SBA 504 loan is right for you, including eligibility, down payment and approved usage requirements.
To be eligible for an SBA 504 loan, you must meet the following criteria:
- Currently operate as a for-profit company in the United States (or its possessions).
- Have an average net income after federal income taxes of under $5 million for the two years preceding your application.
- Have a tangible net worth of less than $15 million. Your tangible net worth is the total value of your assets, not including intangible assets like patents and trademarks, minus the value of your liabilities.
- Plan to use the funding for approved purposes.
- Be able to meet the loan’s down payment requirements, which may range from 10% to 20%.
Approved uses for SBA 504 loans
504 loans can be used for a range of purposes that help create new jobs or business expansion and growth. Common uses include:
- Construction or improvements on existing buildings or land
- Construction of new facilities
- Purchase of long-term machinery and equipment, especially that of a useful remaining life of a minimum of 10 years
- Improvements or modernization of land, streets, utilities, parking lots, landscaping and existing facilities
There are a few things that SBA 504 loans cannot be used for:
- Investment in rental real estate
- Financing of AI-related working capital, consulting services or intellectual property soft costs
- Working capital or inventory
- Repaying or refinancing existing debt
How much do SBA 504 loans cost
Outside of the initial down payment, SBA costs include the loan’s interest rate and loan fees.
Interest rates for 504 loans are about 3%, though your exact rates will vary depending on factors like loan terms, business credit scores and current established rates. According to the SBA, 504 loan interest rates are based on the current market rate for 10-year U.S. Treasury notes. This is more competitive than the rates you’ll get with most private lenders.
Fees will also vary slightly depending on the details of your loan. Rates for the 2024 fiscal year include the following:
- 0% guaranty fee
- Most loans would have an annual service fee of .364% (or 36.4 basis points) of the outstanding loan balance.
- Loans under the 504 Debt Refinance without Expansion Program loans have annual service fees of .389% (38.9 basis points) of the outstanding balance of the loan.
How long does it take to get the money?
There’s no set time frame for how long it may take to complete the application and loan approval process, or how long it may take to receive funding once approved. Keep in mind that your individual CDC lender will need to approve your loan, and then the SBA must approve the application once the bank has signed off.
In general, it takes an average of 30 to 90 days to complete the application process and receive the funds in your account, but it may take more or less time.
Some factors that may influence the speed of funding may include:
- Processing times for individual lenders. CDCs are independent financial institutions, and they each have their own application and approval processes; therefore, some may be faster than others.
- Whether you use an SBA preferred lender. SBA preferred lenders are already authorized to make decisions on SBA loans. Preferred lenders are familiar with SBA loan requirements and may help speed up processing times.
- The underwriting process. If you supply everything that lenders may need for the underwriting process upfront, it can reduce the back-and-forth that can slow down approval processes.
How to apply for an SBA 504 loan
While the details of applying for an SBA 504 loan may vary slightly depending on the lender you use, this is the standard process you can expect:
- Find a Certified Development Company (CDC) in your area. You can search through the SBA database to find a qualified lender.
- Assess each lender’s eligibility requirements. While 504 loans have their own eligibility requirements from the SBA, each lender may also have different requirements to consider.
- Apply for the loan through the CDC. You’ll likely be asked for key information like personal and business credit scores, profit and loss reports, proof of down payment and business tax returns, in addition to details about your plans for how to use the funding.
- Complete the application for 504 loans. This application form should be completed by both the borrower and the CDC. It’s then uploaded to the SBA’s E-Tran system.