A Guide To SBA 504 Loans

The SBA 504 program is an economic development loan program that promotes business growth and job creation. It is administered by the US Small Business Administration in conjunction with local CDCs. Here is a guide to the features and loan criteria.

The SBA 504 loan program focuses on providing financing that leads to community development. The 504 loans are made available through Certified Development Companies (CDCs), SBA’s community-based partners for providing 504 Loans. A CDC is a nonprofit corporation whose mission is to contribute to the economic development of its community. Private sector lenders, CDCs, and the SBA work together to finance and guarantee portions of 504 loans.

How the SBA 504 program works

Approved small businesses participating in the 504 program receive long-term, fixed-rate financing for fixed assets that enhance the economic development of a community. The financing is usually set up so the SBA provides 40% of the total project cost, the borrower contributes 10% of the project cost and a participating lender covers up to 50% of costs.  

Use of 504 Loan Funds

Unlike other SBA loans, monies from the 504 program may not be used for working capital, inventory, refinancing or debt consolidation. Loan proceeds must be used for fixed asset projects such as purchasing land, machinery, or facilities.

The proceeds must be used for fixed assets (and certain soft costs) that include:

• The purchase of existing buildings
• The purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping;
• The construction of new facilities or modernizing, renovating or converting existing facilities
• The purchase of long-term machinery or
• The refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment

504 Loan requirements

In order to qualify for an SBA 504 loan, a business must be a for-profit organization and must meet the size requirements set by the SBA. The net worth of the business must be less than $15 million, with average net income at or below $5 million after taxes for the previous two years. No loans will be made to businesses that are engaged in nonprofit, passive, or speculative endeavors. The maximum amount of 504 loans is usually $5,000,000. Certain manufacturers may qualify for multiple 504 loans at a higher dollar amount Generally, a business must create or retain one job for every $65,000 guaranteed by the SBA.  Small manufacturers must create or retain a ratio of one job for every $100,000.

Alternatively, some businesses may qualify if they meet a community development or public policy goal. These goals include things such as improving the local economy, bringing new income into the community, revitalizing a business district, expanding export, expanding small businesses owned by women, veterans, or minorities. See the SBA website for the complete list of program goals.

Loans in the 504 program mature in 10 or 20 years. 504 loan rates are pegged to the market value of 5-year and 10-year US. Treasury bonds. Loan fees may be financed with the loan. As a rule, the projects being financed under the program are used as collateral on the loan, and personal guarantees of 20% or more are usually required from the owners.

504 loan applications are processed through local CDCs. To find a CDC, visit this SBA page.

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