SBA 504 Loan Program

SBA stands for the U.S. Small Business Administration, a government agency that is committed to promoting small businesses and helping them achieve financial stability.

What is the SBA 504 Loan Program?

The SBA 504 Loan program — also called an SBA 504/CDC loan — is a government-backed loan designed to help existing businesses expand and promote job creation. It provides small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization.

What is a CDC?

A Certified Development Company (CDC) is a nonprofit corporation, certified and regulated by the SBA. CDCs work with the SBA and participating lenders to provide financing to small businesses within its community. The goal of the CDC is to promote economic development within its community through 504 Loans.

SBA 504/CDC loans therefore involve two lenders: a bank and the CDC. Each party lends a portion of your total loan amount. Since there is more than one lender involved, there are extra SBA loan requirements for these business loans.

Who may qualify for the program?

To qualify for a 504 Loan, your business must be operated for profit and must have:

  • A tangible net-worth of no more than $15 million
  • An average net income of $5 million or less after federal income taxes for the two years preceding the application

Loans cannot be made to businesses engaged in nonprofit, passive or speculative activities and start-up businesses are not eligible.

There are also economic development requirements for the SBA 504 loan.

What are the Economic Development Requirements for a 504 loan?

Economic development is promoted by creating jobs and so there are requirements for job creation associated with the 504-loan program. 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.

As an alternative to job creation or retention, your business may qualify if it meets a community development or public policy goal.

What can SBA 504 loan funds be used for?

Some of the eligible uses of the funds are:

  • Purchase and development of real estate
  • Purchase of land and improvements, including grading, street improvements, utilities, parking lots and landscaping
  • Construction of new facilities
  • Modernizing, renovating or converting existing facilities
  • Purchase of long-term machinery; or
  • Refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment

The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing (except for projects with an expansion component)

How much can my business borrow?

There is no maximum project size but the maximum SBA loan amount (debenture) is $5 million.  Small manufacturers or specific types of energy projects may qualify for a $5.5 million debenture.

What is the structure of an SBA 504 loan?

SBA 504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.

What are the fees, interest rates and terms of the 504 loan?

Interest rates on 504 Loans are correlated with the current market rate for 5-year and 10-year U.S. Treasury issues. Loan maturities of 10 and 20 years are available. Fees may be financed

What are collateral requirements?

Generally, the project assets being financed are used as collateral. However, as with other government guaranteed loans, personal guarantees from owners of 20% or more of the business are also required.

What are the benefits of the SBA 504 loan program?

The 504 Loan program offers small businesses both immediate and long-term benefits, so business owners can focus on growing their business.  Some of the top-level benefits include:

  • Low down payment: up to 90% project financing
  • Longer loan amortizations with no balloon payments
  • Fixed-rate interest on the SBA 504 portion.
  • Savings that result in improved cash flow for small businesses

Eligibility Checklist

1. Are you a citizen or lawful permanent resident of the United States?
2. Do you have a U.S.-based, officially registered and operating, for-profit business in an eligible industry? Nonprofit businesses are not eligible for SBA guaranteed loans.
3. Does your business meet the SBA’s size requirements for small business? You can  check whether your business is small using the size standards interactive tool on the SBA website.
4. Can you demonstrate that you have a good background and personal character?
a. Do you have good credit (min FICO Score 680) and a strong credit history?
b. Are you willing to provide information about your personal background,
including previous addresses, your citizenship status and your criminal record?
5. Does your existing business have a good business credit score? The FICO Small Business Scoring Service (SBSS) indicates how well your business has met financial obligations to vendors, lenders and suppliers and should be at least 160.
6. Can you show that other financing options are not available to you? The SBA will not guarantee your loan if you can get financing with reasonable terms from a lender without their help.
7. Can you provide evidence that you have invested or are willing to invest your own time and money in your business to make it successful?
8. Are you willing to provide personal guarantees from all owners, individuals or entities, with at least a 20% ownership stake in the business?
9. Does your project meet the economic development requirements of the 504-loan program?
a. Job creation/retention or:
b. Community development or public policy goals?

If you answered ‘Yes’ to all or most of the questions, please contact us to get the process started.

The SBA lending process, as with other government-backed loans, comes with more documentation and research than most other business loans. The SBA 504 loan has stricter eligibility requirements, require a long, involved application and coordination with different financing institutions. However, if your business qualifies and can help create jobs, it could be easier getting an approval than the 7(a) programs because there are fewer applicants.

This is where we, LaGray Finance, come in. We work with you right from the start to make an otherwise stringent process look smooth and easy. LaGray Finance partners with you to put together an application package that ensures success in the end.