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SBA 504 Loans: The Ultimate Guide

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Sometimes it takes a big investment of resources to move the needle for your small business. Maybe there’s special equipment that could save you money on labor and make you more productive. There might be a building next door that would make a perfect addition to your shop. Or, your existing facility might need a serious facelift.

In each of these cases, an SBA 504 loan could be the perfect business financing solution. These business loans offer up to $20 million or more to purchase real estate, equipment, and machinery. You can also use them to remodel or upgrade existing facilities. 504 loans are very small business-friendly, requiring only a 10% to 20% down payment and offering 10- to 25-year terms and low interest rates.

Learn about how SBA 504 loans work, the standard cost and terms, and how to improve your chances of qualifying.

SBA 504 Loans: How Do They Work?

An SBA 504 loan is a type of SBA loan that can be used to purchase fixed assets or upgrade existing assets.

An SBA 504 loan can be broken down into three parts:

  1. Bank loan (50%): A bank or direct lender extends 50% of the total loan amount.
  2. CDC loan (40%): An SBA-approved certified development company (CDC) extends 40%re of the total loan amount.
  3. Down payment (10%): This loan requires a 10% down payment from the borrower. Startups and special use properties have to put more money down.

The bank and CDC work closely together in issuing your 504 loan, but it’s important to remember that the SBA oversees and regulates only the CDC component of the loan. Most of the terms that we’re mentioning in this article apply only to the CDC portion of the loan. Banks are free to set their own eligibility requirements and terms for the bank portion of the loan.

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

Regardless of the amount that you borrow, you’ll be required to put down 10% (more for startups or special use properties). This SBA loan down payment is about half of what banks typically require for conventional loans. The down payment 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 the 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.

sba 504 loan

Who’s Eligible for an SBA 504 Loan?

As with all SBA loan programs, qualifying for an SBA 504 loan isn’t easy. These loans are typically reserved for creditworthy borrowers, and most 504 loans go to already-established businesses. If you have a startup, you can still qualify, but you’ll need to demonstrate excellent credit and strong financials.

SBA 504 Loan Requirements

In order to qualify for this type of financing, you’ll need to meet the following 504 loan program requirements:

  • Meet the SBA’s size standards for small business, which differs based on industry
  • 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
  • Business must operate for profit and not be in a passive industry, such as real estate investing

Out of all of these requirements, the ones that trip up most businesses are the owner occupancy and jobs and public policy requirement. For SBA 504 loans that are used to buy or renovate buildings, the applicant 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 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). 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.

SBA mid-Atlantic regional administrator 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.”

One way to get around the jobs requirement is to satisfy another public policy goal:

  • 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
  • Aiding rural development
  • Increasing an industry’s productivity or competitiveness (e.g. STEM or health industries, competition with imports, etc.)
  • Modernizing or upgrading facilities to meet health, safety, and environmental requirements
  • Assisting businesses in or moving to areas affected by federal budget reductions
  • Reduction of rates of unemployment in labor surplus areas, as such areas are determined by the Secretary of Labor

Most 504 loan applicants should be able to fall into one of the broader public policy categories, such as improving the local economy or stimulating new income and investment. Make sure you’re able to 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 or personnel records to make your case to the SBA.

In addition to the basic 504 loan requirements mentioned above, a successful borrower also needs to have a good credit history. Each bank and CDC will have their own specific credit requirements, but in general, you’ll need a personal credit score above 650 and no red flags, such as bankruptcies, in your recent financial history. You’ll also need minimal existing debt (your debt service coverage ratio should ideally be higher than 1.2).

SBA 504 Loan Eligible Loan Uses

To qualify for a 504 loan, your intended use of the financing must be one of the following:

  • Purchasing equipment or machinery
  • Purchasing land or existing buildings
  • Purchasing improvements (e.g. street grading, utilities, parking lots, etc.)
  • Building new facilities
  • Renovating, remodeling, or converting existing facilities
  • Refinancing existing debt that’s being used to pay for fixed assets

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

The SBA gets pretty specific on the rules for eligible loan uses. If you’re planning to use the SBA 504 loan to purchase, renovate, or convert an existing building, it must be at least 51% owner-occupied. For instance, if you’re acquiring a building with five office spaces, you can 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.

And 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.

sba 504 loan

SBA 504 Loan Rates, Fees, and Terms

The biggest benefits of an SBA 504 loan are the low interest rates and long terms. Since the loan is government-backed, the rates and fees on a 504 loan are a lot lower than what you’re likely to find with a private lender or hard money lender. But it’s still important to understand everything that goes into the cost of your loan.

SBA 504 Loan Interest Rates

504 loan interest rates are actually 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 rates are calculated is pretty complicated. Using information published each month by the National Association of Development Companies (NADCO), the official organization for CDCs, several lenders publish the latest SBA 504 loan interest rates. Even after accounting for fees, the interest rates are usually below market compared to what you’d get with a standard bank loan.

Rates on the CDC portion of the loan change monthly in tandem with U.S. treasury rates. However, the rate that you get when you sign your loan agreement is fixed for the life of the loan. That’s hugely beneficial when planning your business’s finances, knowing that the interest rate three years from now will be the same as it is today.

The bank or the lending institution decides interest rates for the bank portion of the loan. Rates on the bank portion aren’t as low as the CDC rates, and can either be fixed or variable. These rates are typically equivalent to what you’d expect on a commercial real estate loan.

SBA 504 Loan Fees

When the CDC quotes you an interest rate, ask whether the rate includes fees.

There are five main fees for this loan:

  • SBA Guarantee Fee – This SBA guarantee fee is currently set at 0.5% upfront.
  • Servicing Fee – The servicing fee, charged annually, currently ranges from a minimum of 0.625% to a maximum of 2% per year.
  • Processing Fee – The processing fee is currently set at 1.5%.
  • Funding Fee – The funding fee is currently set at 0.25%.
  • Closing Costs – No more than $2,500.

Along with these fees, you can expect to pay other fees, such as an underwriter’s fee and annual guarantee fee. Keep an eye out for notices from the SBA that announce rate changes. The fees mentioned above are charged by the SBA or CDC and apply only to the CDC-funded portion of the loan. The bank might charge additional fees on the bank portion of the loan.

SBA 504 Loan Repayment Terms

SBA 504 loans have really long repayment terms, which is part of what makes them so beneficial for small business owners. A long repayment term translates to lower monthly payments for your business, which helps you conserve cash flow.

The term of this loan depends on what you’re using the loan for. The term is 10 years if you’re purchasing machinery or equipment, and 20 or 25 years if you’re purchasing or converting land or buildings.

sba 504 loan

How to Apply for an SBA 504 Loan

Once you decide to get an SBA 504 loan, it’s time to find a lender who can help. Since the bank and CDC are both involved in this process, you’ll need to find a bank that’s willing to work on the bank portion of the loan and a CDC that’s willing to work on the CDC portion of the loan.

Many national, regional, and community banks participate in the SBA 504 lending program. You can ask the bank that you already use for business banking or try one of the institutions on our best banks for small businesses list. 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 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. Larger CDCs have more experience with 504 loans and tend to offer faster processing. Jim Conroy, regional president at New York Business Development Center (NYBDC), says, “We recommend working with a larger CDC as they usually have preferred processing with the SBA.”

The application process, once you find a CDC and bank, can be pretty lengthy and time intensive. Getting a 504 loan can take several months and many hours of paperwork. Small business owner Drew Johnson recently obtained an SBA 504 loan for his company Lagerhead Cycleboats. Johnson used the funds to purchase a new boat to launch a second location in Fort Lauderdale, Florida. He shared his experience with us:

“The process has been the most difficult loan process I have ever been a part of. It is like a home loan, but 10x as difficult and frustrating. The time it took to secure the loan was countless hours that we could have spent working on our business and working on launching the second location.”

Although closing on the loan took several months, in the end Johnson believes that the interest rate made it worthwhile. To speed things up, it helps to be as organized as possible during the process and keep a regular communication line open with the lender and the CDC.  

NYBDC’s Conroy says, “We recommend having all required financial documents ready and available before applying for a 504 loan in order to make the process more streamlined.”

These documents include your business plan, business tax returns, historical financial statements, business bank statements, and current debt schedule. Your CDC and bank will let you know if there is additional paperwork that you need to submit to complete your business loan application.

Best Alternative to SBA 504 Loans: The SBA 7(a) Loan

If the terms of the SBA 504 loan sound good to you but the process sounds too long, an SBA 7(a) loan could provide a happy middle ground.

Like 504 loans, SBA 7(a) loans offer long repayment terms and low interest rates (though not quite as low as the 504 loan).

But, 7(a) loans offer more flexibility than a 504 loan. You can use SBA 7(a) loans for virtually any business purpose, including working capital, purchasing equipment, purchasing real estate, renovations, or refinancing. The application process is still long but not as long as that for a 504 loan. The typical timeline for getting an SBA 7(a) loan is 30 days, whereas a 504 loan can take several months.

SBA 504 Loans Are Ideal for Big Business Investments

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.

For some small business owners, such as Jill McLaury, founder of Bright Futures Learning Services, an SBA 504 loan is the perfect financing option. McLaury used a 504 loan to purchase a new location for her business, which provides behavioral treatment programs for children with autism in West Virginia.

“Bright Futures is very important to me because I struggled with a learning disability when I was young,” says McLaury. “It was never my intention to be an entrepreneur; all I wanted to do was help as many children as I could.  I eventually learned that helping children necessitated that I become an entrepreneur, and with the help of SBA’s 504 Loan Program, I was able to grow my practice.”

Even though this is a great loan option, there are multiple working parts to a 504 loan. You need to have a reliable bank and CDC to work with. And you need to have the patience to see the application process through to the end. But if you hang in there, you’ll be rewarded with low-rate, long-term financing that will help you reach your business’s most ambitious goals.

Priyanka Prakash, JD

Priyanka Prakash, JD

Priyanka Prakash is a senior staff writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U.C. Berkeley in communications and political science. Priyanka's work has been featured in Inc., Fast Company, CNBC, and other top publications. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup. Email: