SBA 504 Loan: What It Is & How It Works
This article is part of a larger series on Business Financing.
504 loans offered through the Small Business Administration (SBA) are designed to provide funding for fixed assets that help in the creation of jobs or business growth. Some examples of allowable uses include the purchase or construction of land, buildings, machinery, and other equipment.
An SBA 504 loan has two separate funding sources: Certified Development Companies (CDCs) provide 40% of the funds while an SBA-approved lender provides 50%. The remaining 10% comes as a down payment from the borrower.
The program typically allows for a maximum financing amount of $5.5 million. To get the process started, you’ll need to find a local CDC and meet various other SBA program requirements.
Who Should Get an SBA 504 Loan?
An SBA 504 loan could be a good fit if you are eligible for this type of loan and intend on using it for acquiring assets that support job creation and business growth.
| Allowable Uses Include | Prohibited Uses Include |
|---|---|
| Business equipment | Working capital |
| Land | Inventory |
| Buildings | Debt consolidation |
| Parking lots | Debt repayment, including refinances |
| Streets | |
| Landscaping, curbs, and sidewalks | |
| Production facilities | |
The SBA specifically prohibits funds from being used for the items listed above. If you need funds for any of those, you can consider an SBA 7(a) loan. You can learn more by heading over to our guide on SBA 7(a) loans, where we cover its rates, terms, and qualification requirements.
Summary of SBA 504 Loan Rates, Terms & Qualification Requirements
An SBA 504 loan can be viewed as two loans in one. This means you’ll have to look at two sets of rates, terms, and qualification requirements.
For instance, you’ll be paying two separate interest rates on your SBA 504 loan—one for the CDC portion and the other for the lender’s portion. Similarly, SBA 504 loan qualifications will be a combination of what the SBA requires and a lender’s own eligibility criteria.
Typical Interest Rates |
|
|---|---|
Maximum Loan Amount | $5.5 million |
Repayment Term | 10, 20, or 25 years |
Minimum Credit Score | Varies by lender, but 680 is recommended |
Minimum Time in Business | More than 2 years is recommended |
Required Debt Service Coverage Ratio (DSCR) | Varies by lender, but 1.25x is recommended |
SBA 504 Loan Rates
Since SBA 504 loans are essentially two loans in one, you’ll pay interest on the CDC portion of the loan and a different interest rate on the bank’s portion.
SBA 504 Rates on the CDC Portion
SBA 504 loan rates on the CDC portion of the loan can change every month. You can view the latest rates in our guide on current SBA loan rates.
Loan Term | Interest Rate (as of June 5, 2023) |
|---|---|
10 Years | 6.036% |
20 Years | 6.072% |
20-year Refinance | 6.090% |
25 Years | 6.020% |
25-year Refinance | 6.038% |
SBA 504 Loan Rates on the Lender Portion
In addition to the rate you pay on the CDC portion of your SBA 504 loan, you’ll also pay a separate interest rate on the lender portion of the loan. That interest rate will vary depending on the provider you choose but typically ranges between 6% and 12%.
SBA 504 Loan Fees
Loan fees will apply to both the CDC and lender portions of the loan. As is the case with rates, lender fees can vary depending on the provider you choose, your qualifications, and the loan terms you’re seeking.
SBA 504 Loan Fees for the CDC Portion
The SBA 504 loan fees you pay could be impacted by a number of factors unique to your loan.
However, federal regulations do exist—and they impose limitations on the type and amount of fees that can be charged. You can view these regulations online, but they include the following:
- SBA guarantee fee: No more than 0.9375% of the unpaid loan balance, calculated at five-year intervals
- Processing fee: No more than 1.5% of the 504 portion of the loan
- Closing fee: Varies
- Monthly servicing fee: 0.625% to 2% of the loan balance, calculated at five-year intervals. Up to an additional 1.5% may apply in extenuating circumstances if deemed necessary to cover related loan costs
- Funding fee: Not to exceed 0.25%
- Participation fee: 0.5% on the lender’s share, plus up to 1.5% of the CDC portion
To reduce your upfront costs, fees can often be included with your loan. And although the fees mentioned above may seem excessive, they will usually total around 3% of your total loan amount.
SBA 504 Prepayment Penalties
Another type of fee that applies to SBA 504 loans is a prepayment penalty. For a 10-year loan, the penalty applies for the first five years. For a 20- or 25-year loan, the prepayment penalty applies for the first 10 years.
To calculate the dollar amount of your prepayment penalty, you’ll need to know your loan’s debenture rate. The debenture rate is different from the rate you get on the loan and reflects the portion of the loan that your CDC is paying investors in exchange for a portion of the funds needed to issue the SBA 504 loan. Debenture rates can vary from month to month.
Below are two examples of the prepayment penalty you might see on a 10-year loan and a 25-year loan.
SBA 504 Loan Fees for the Lender Portion
Fees on the lender portion of your SBA 504 loan can vary depending on your qualifications as a borrower and the provider you choose. Although there aren’t any restrictions on what a lender can charge, fees are still almost always more competitive than most other types of loans.
SBA 504 Qualification Requirements
To qualify for an SBA 504 loan, you’ll need to meet both a lender’s requirements and SBA-specific criteria.
SBA Requirements
Eligibility criteria for SBA 504 loans include the following items:
- You must operate as a for-profit company based in the U.S.
- You must have a tangible net worth that does not exceed $15 million
- Your average net income for the past two years must not exceed $5 million
- Adhere to the requirements listed on the SBA website for SBA size standards
- You must have a minimum down payment of 10%
- Must not be delinquent on any federal debt (this includes federal student loans)
- If acquiring real estate, property must be at least 51% owner-occupied
- Assets being acquired must support job or business growth
- Have a satisfactory business plan, character and ability to repay the loan
Some of these requirements are flexible. For example, the SBA does not specify all of the items that must be met for a business to document a sufficient ability to repay a loan. Rather, the SBA allows individual lenders to establish many of these criteria.
Lender Requirements
In addition to the SBA-specific requirements, lenders can implement their own set of eligibility criteria. This commonly includes things like a minimum credit score, annual revenue, and DSCR.
- Personal credit score: Scores generally range from 300 to 850, and it’s recommended to have a credit score of 680 or above to improve your chances of getting approved.
- Business credit score: Lenders may use the FICO Small Business Scoring Service (SBSS) to evaluate your loan application. Scores range from 0 to 300, and it’s recommended that you have at least 160 for a better likelihood of getting approved.
- DSCR: You can calculate this figure by taking your company’s net operating income, and then dividing it by your current year obligations. A DSCR of 1.25x or greater is what most lenders will be looking for. You can also use our calculator in our guide on DSCR.
- Time in business: While some companies do work with startups, it can be much easier for you to get an SBA 504 loan with a minimum of two years’ time in business.
- Down payment: SBA 504 loans require a minimum 10% down payment, but you may want or need to place a larger amount depending on your qualifications, loan terms, and lender.
SBA 504 Loan Pros & Cons
The year 2022 saw a large increase in SBA 504 loan popularity. According to the SBA’s website, it guaranteed over 67% more of these loans in 2022 compared to the year prior. The volume of SBA 504 loans funded has increased each year since 2018.
To explain the popularity of SBA 504 loans, here are some of the benefits that are offered with this loan and some potential downsides to be aware of.
| PROS | CONS |
|---|---|
| Have low interest rates | Can take 60 to 90 days before funds are disbursed |
| Can have lower down payment requirements than other types of loans | Startups may have more difficulty qualifying |
| Have a long repayment period of up to 25 years | May require large amounts of paperwork to get approved |
| Rarely require any additional collateral beyond the assets being acquired | |
How To Get an SBA 504 Loan
Getting an SBA loan is a process that can be broken down into four steps. You’ll need to understand your loan options, review your eligibility, find an SBA 504 lender, and then submit an application.
We summarize each of these steps below, but you can also head over to our guide on how to apply for an SBA loan for more details on each stage.
There are several different types of SBA loans available, each with its own set of terms, qualification requirements, and allowable uses. To learn more, you can head over to our article on the different types of SBA loans. Once you’ve decided on the type of loan best suited for your business needs, your next step will be to review your SBA loan eligibility.
SBA lenders will evaluate your application to determine if you can be approved. However, doing your own due diligence before applying and understanding how you’ll be evaluated can allow you to better present your business in a manner that improves your chances of approval.
SBA requirements can be broken down into three categories: general SBA requirements, loan-specific requirements, and lender-specific requirements.
To get an SBA loan, you’ll need to find a lender that works with the SBA. This can include online lenders, banks, credit unions, and brokers. You can start with our list of the best SBA lenders.
The SBA also provides an online tool called SBA Lender Match. This is a questionnaire designed to provide you with lenders that may be able to help you based on your business needs.
Once you’ve found a lender, the next step is to submit a formal loan application and provide any documents that are requested. SBA loans can require a significant amount of paperwork, so be prepared to provide a number of financial documents. Some examples can include:
- Tax returns
- Profit and loss statements
- Balance sheets
- Business plan (see our SBA business plan guide and template)
- Business licenses and relevant professional certifications
- Bank statements
If you’re looking to get an SBA 504 loan, Lendio is one company we recommend. It’s a broker with over 75 lenders in its network, so you can get multiple options and have a better chance of qualifying for the lowest rates available.
SBA 504 Loan vs Alternatives
SBA CDC/504 Loan | SBA 7(a) Loan | Typical Commercial Real Estate Loan | |
|---|---|---|---|
Typical Interest Rates | 6% to 6.5% |
| 7% to 14% |
Required Minimum Down Payment | 10% | 10% | 0% to 20% |
Typical Repayment Term | 25 years | 25 years | 25 years |
Maximum Loan Amount | $5.5 million | $5 million | $5 million to $50 million-plus |
Typical Credit Score Required | Varies, 680 recommended | Varies, 680 recommended | 650+ |
Funding Speed | 60 to 90 days | 60 to 90 days | 30 to 60 days |
DSCR | Typically 1.25x | Typically 1.25x | Typically 1.25x |
Commercial real estate loans can be a viable alternative if you find that an SBA loan is not the right fit. If this is the case with your business, consider viewing our recommendations for the best commercial real estate loans.
Frequently Asked Questions (FAQs)
An SBA 504 loan can be used to finance major fixed assets that can help promote the creation of jobs or growth of a business. Some examples can include the construction of a new office building, improvements to land, and construction of production facilities.
Yes, it is. You may see these terms used interchangeably—but they refer to the same loan program. SBA 504 loans consist of two loans: one portion is funded by a Certified Development Company (CDC), while the other portion is funded by an SBA-approved lender.
It typically takes 60 to 90 days to get an SBA 504 loan. This is dependent on the complexity of your business, your loan application, how quickly you can provide documentation to your lender, and the length of time needed for your lender to conduct its own due diligence and verifications.
Bottom Line
An SBA 504 loan is a good option if you need funding for equipment, real estate, or other business expenses that promote job growth. It can take two to three months to get an SBA loan, and you should be prepared for a significant amount of paperwork. However, these loans carry favorable loan terms including low rates, long repayment terms, and a high maximum funding amount. To ensure a smooth process, we recommend reading our guide on how to get a small business loan.
