Your Guide to SBA 504 Loans | Small Business Loan Options

SBA 504 loans can provide a much-needed boost for businesses needing funding. As one of the few loans available to small business owners looking for low down payments, lengthy terms, and fixed interest rates, this loan offers an attractive option when financing a project. In this guide, we will highlight all that goes into purchasing or refinancing with an SBA 504 loan - from eligibility requirements to agency involvement and how we can help make it happen! Whether you are launching a new venture or growing an existing company, read on for a comprehensive overview of taking advantage of an SBA 504 loan!

What is an SBA 504 Loan?

The U.S. Small Business Administration designed a loan program to help small businesses obtain their needed funding. The SBA 504 Loan provides long-term, fixed-rate financing for major fixed assets, such as real estate, land, or equipment, that meet specific criteria. With low down payments and competitive interest rates, the SBA 504 Loan can be an excellent option for small businesses looking to take the next step toward success.

Related Reading: Business Owner's Guide to SBA Loans

What are the Benefits of an SBA 504 Loan?

The benefits of an SBA 504 loan are undeniable, particularly regarding credit scores, terms, and conditions. This type of loan offers low-interest rates and longer payment terms, making it an attractive option for smoothing cash flow. Plus, the SBA 504 loan doesn't require as high of a credit score as traditional lenders to qualify. The minimum credit score for an SBA 504 typically ranges from 620-640. 

light bulb green icon Fundid Recommendation: Ready to see if you qualify for an SBA 504 loan? Our partners at Lendio can help! Lendio is the nation’s leading small business loan marketplace. With a single, free application, business owners can gain access to over 75 financial institutions that offer a number of different financial services. They have options from term loans and lines of credit to SBA loans and everything in between–all in one place. Apply for funding today through Lendio!

How to Apply for an SBA 504 Loan

The Small Business Administration's 504 loan program provides an efficient way to secure funding for your business. 

  1. First, gather your financial documents and prepare a business plan.
  2. Next, find a lender that works with the SBA to offer the funding.
  3. Then, complete the loan application and submit it to the lender for review. There may be additional paperwork needed after the initial application.
  4. Lastly, wait for the approval and begin reaping the benefits of your SBA 504 loan. Approval typically takes 60-90 days but can take as long as 6 months in some cases. 

Eligibility Requirements for an SBA 504 Loan

Most lenders will look for the following requirements: 

  • 600+ personal credit score 
  • At least $8,000 in monthly revenue 
  • 2+ years time in business 

Lendio has one centralized application that reached over 75+ different lenders! 

Loan Terms and Interest Rates

SBA 504 Loans have a maximum loan amount of $5 million and can have a variety of purposes. The loan term depends on the use of the funds but can be as long as 25 years for real estate projects and ten years for equipment or machinery purchases.

Compared to other SBA loan programs, SBA 504 Loans have several advantages. For example, while SBA 7(a) loans can be used for broader purposes, they often have lower loan amounts and shorter terms. SBA microloans have even lower loan amounts and shorter periods but are easier to qualify for. The higher loan amounts and longer terms offered by SBA 504 Loans make them an excellent option for businesses looking to invest significantly in their growth.

SBA 504 Loans have fixed interest rates determined at the time of the loan approval. These rates are based on the current market rate for U.S. Treasury bonds. As a result, they are typically lower than the rates offered by traditional lenders. In addition, SBA 504 Loans offer the option of a 10-year or 20-year fixed rate, providing businesses with long-term stability and predictability in their monthly loan payments.

The Role of the Certified Development Company (CDC)

The role of a CDC in the SBA 504 Loan program is to provide funding for small businesses looking to invest in real estate or equipment. CDCs partner with the SBA and private lenders to finance small businesses that might not otherwise qualify for traditional bank loans. The SBA 504 loan typically follows a 50-40-10 breakdown, meaning a private lender provides 50%, the CDC provides up to 40% of the total project cost, and the small business owner provides a down payment of 10%.

Small business owners can search the SBA website for a list of approved CDCs in their area to contact and start the application process. The CDC will work with the small business owner to determine eligibility, provide guidance on the loan application process, and help them navigate the complexities of the SBA 504 Loan program.

There are many benefits to working with a Certified Development Company (CDC). They have extensive experience working with the SBA and can provide valuable guidance and expertise throughout the loan application process. Additionally, CDCs are focused on supporting the growth and success of small businesses in their community, so they are invested in helping their clients succeed.

Closing and Funding

If you're a small business owner approved for an SBA 504 Loan, the next step is closing and funding your loan. Let's first take a closer look at the closing process, disbursement of funds, and requirements for ongoing reporting and monitoring.

The closing process for an SBA 504 Loan can be complex and typically involves significant documentation. Small business owners must provide financial statements, tax returns, and other documents demonstrating their ability to repay the loan. They must also work with their CDC and private lender to finalize the loan terms and sign the necessary paperwork.

Once the loan has been closed, the funds are disbursed. The disbursement of funds for an SBA 504 Loan is typically done in stages. The CDC provides the first portion of the funds at closing, and the private lender provides the remainder. After that, the funds will be disbursed directly to the vendors or contractors working on the project.

After the loan has been funded, small business owners are required to provide ongoing reporting and monitoring. This includes regular financial reporting and compliance with any loan covenants. The CDC and private lender will work with the small business owner to provide guidance on these requirements and ensure that they are being met.

Taking out an SBA 504 Loan

Taking out an SBA 504 Loan can be an effective and powerful way to grow your business. The loan's low down payment and fixed terms make it a more manageable debt than other traditional loans. Unlike other loan types, the SBA 504 Loans must go through the Certified Development Company, a trusted partner guiding the way.

Taking out an SBA 504 loan for your business can be an incredibly exciting process, as it provides access to funds that can help you take the next step in your company's growth. With low down payments and below-market fixed interest rates, a 504 loan allows you to invest in long-term assets or capital improvements to help your business expand its capabilities and increase profitability.

Apply today for an SBA 504 loan through Lendio! They will pair you with loan options from their network of 75+ lenders. Their dedicated funding managers can help you weigh the pros and cons of each option.

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