
What is the 504 Loan Program?
A powerful economic development loan program that offers small business financing, while promoting business growth, and job creation. This program is a proven success and win-win-win for the small business, the community and participating lenders.
504 Program FAQs
Certified Development Companies (CDCs), SBA’s community-based partners, provide approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization.
504 Loan Structure
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.
504 Loan Example
Total 504 projects costs for a $1,000,000 project may include the following (eligibility requirements apply to the 504 portion of the project as well as the participating lending portion):
- Building Purchase
- Land
- Renovation
- Furniture and Equipment
- Soft Costs
- TOTAL $1,000,000
Loan Structure
- $500,000, 1st lien with bank (loan obtained from a private sector lender covering up to 50% of the total project cost)
- $400,000, 2nd lien with 504 loan, 20 year, fixed rate (loan obtained through a CDC, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost)
$100,000, borrower contribution (contribution from the borrower of at least 10% of the total project cost)
How 504 Loan Funds May Be Used
The use of proceeds from 504 Loans must be used for fixed assets (and certain soft costs), including:
- 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.
Small Business Owner Advantages
- Low Borrower Injection (as little as 10%)
- Up to 90% financing, to preserve working capital
- Fixed Rate up to 40% of Total Project Cost
- Low Market Interest Rates
Private Lender (Bank) Advantages
- Reduced Risk with 50% Loan to Value
- First Lien Position on Assets Financed, and are Salable on the Secondary Market
- Saves A/R and Inventory for Additional Financing
- Enhanced Portfolio Diversity with CRA Qualified Debt
Eligible Use of Funds
- Land and Building Acquisition
- Building Expansion
- Building Construction or Renovation
- Machinery and Equipment
Eligible Businesses
The company must be a for-profit corporation, partnership, LLC, or proprietorship whose tangible net worth does not exceed $15 million, and whose average profit after tax for the preceding two years, does not exceed $5 million.
Project Size
Private Lender: the maximum loan amount of the private lender is not limited by the SBA. However, the private lender must fund at least 50% of the total project cost.
Maximum Loan Amount (Debenture): While there is no maximum project size, the maximum SBA loan amount (debenture) is $5 million. Small manufacturers or specific types of energy projects (as described in the energy project section) may qualify for a $5.5 million debenture.
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 as long as the CDC maintains its portfolio job average requirements. (More detail can be found on the SBA’s website).
Maturity Terms & Interest Rate
Maturity Terms:
- 20 years for Real Estate
- 10 years for Long-term Machinery and Equipment
Interest Rate:
- Private Lender: Rate is negotiated with the small business owner
- SBA: Rate is fixed for the term of the loan
Ineligible Businesses
- Passive Investment Companies
- Real Estate Investment Companies
- Non-Profit Corporations
- Financial Institutions