SBA 504 Loan Program for Startups & Small Businesses

02/10/20 | 7 MIN READ

Learn how the SBA 504 loan can be used for startups and small businesses.

According to the Small Business Administration, "The SBA 504 loan program is a powerful economic development loan program that offers small businesses another avenue for business financing while promoting business growth and job creation. As of February 15, 2012, the $50 billion in 504 loans has created over two million jobs. This program is a proven success and win-win-win for the small business, the community, and participating lenders."

If you need funding for your company and are considering all of your options, you may be able to obtain a loan. When you request a loan of any kind, you will receive money that will eventually need to be paid back. The most common types of loans are car loans and mortgages.

While you receive money with a loan, this money will need to be paid back over a certain period of time via monthly payments. The majority of lenders will include an interest rate with the loan, which could be anywhere from one percent to upwards of 20 percent. The loan that you obtain can be issued by a bank, the government, or a wide variety of other financial institutions. Loans can either be secured or unsecured, the former of which is backed by collateral such as a home or vehicle.

The SBA 504 loan program provides small businesses and startups with the ability to obtain a loan for their business. These loans are backed directly by the U.S. Small Business Administration and offer long-term financing that can be used for a variety of fixed assets such as equipment and real estate. The three separate parties that are involved with this loan include the bank, the borrower, and a Certified Development Company that's been approved by the SBA.

united states small business administration logo

The Small Business Administration was created specifically by the U.S. government to provide support to small businesses and entrepreneurs. If you require a sizable loan and are unable to obtain direct investments from angel investors or venture capital firms, the SBA 504 loan program may be the right fit for you.

The following article takes a look at the 504 loan program and how it can be used for startups and small businesses. Once you're finished reading the entirety of this article, you'll understand every facet of the 504 loan program, which should make it easier for you to fill out an application.

What Is the 504 Loan Program?


The 504 loan program by the Small Business Administration is a kind of loan that can be used to purchase fixed assets or upgrade some of your existing assets. This program was created to provide smaller businesses with another opportunity to obtain financing that can help them remain stable or grow their company. These loans are available through Certified Development Companies, which are nonprofit corporations that are created to promote and foster economic growth within the surrounding community.

It's possible for you to obtain as much as $20 million with a 504 loan, which would allow you to purchase equipment, machinery, or real estate. These funds could also be used for the upgrade or remodel of any existing facilities. The 504 loan program was designed specifically to be friendly to smaller businesses, which means that it comes with relatively favorable terms.

About CDCs


An important component to understand with the 504 loan program is the CDC that issues the loan.

  • A CDC is any nonprofit corporation that was created for the main purpose of fostering economic growth in the community.

Along with the bank that provides some of the financing with this loan, the CDC that offers you the loan is an integral component. Any company that wants to be a CDC will need to be certified and regulated by the SBA, which allows for quality control.

By providing funding to small businesses and startups, CDCs believe that the company will be able to gain stability and eventually grow, which helps with economic growth in the surrounding community. There are currently more than 260 CDCs in the country, the majority of which are only able to provide loans to businesses that are located in the state that the CDC operates in.

504 Loan Structure


There are three main components of a 504 loan, which include:

  • The bank loan
  • The CDC loan
  • The down payment

The bank loan covers around 50 percent of the amount for the total loan. On the other hand, the CDC loan is designed to cover 40 percent of the total loan, which helps to minimize some of the risk that the bank is taking on. The down payment that you are required to make will cover around 10 percent of the loan, which means that you will need to make a $100,000 down payment if you're requesting a $1 million loan.

Keep in mind that newer startups will need to make a somewhat higher down payment in order to qualify for the loan, which could be anywhere from 10-20 percent.

While the CDC works closely with the bank when issuing this loan, the SBA regulates the CDC portion. All of the terms that are discussed in this article pertain solely to the CDC aspect of the loan. Banks can set their own qualification requirements for 50 percent of the loan. While it's possible to receive a $20 million 504 loan, the maximum amount of the CDC portion of the loan is $5 million.

504 Loan Eligibility Requirements


The eligibility requirements for obtaining a 504 loan are relatively strict, which is the case for nearly all loan types available from the Small Business Administration.

The primary eligibility requirements that you should be aware of include:

  • Must meet the size standards for a small business, which is different with each industry type
  • You must meet the owner occupancy requirements set forth by the SBA, which state that the borrower must occupy 51 percent or more of the property
  • Must have a net worth of less than $15 million and a net income of less than $5 million for each of the two years before you send in your application
  • The project that the funds are being used for will need to allow you to retain or create at least one job
  • Your business will need to be focused on seeking profit

Provide a Business Plan


You will also need to have consistent financials and great credit in order to qualify for the loan. CDCs only issue these loans because they want small businesses and startups to improve the economy around them, which is why the requirement for creating jobs is listed. While most of the requirements on this list are strict ones, you could still be approved for a 504 loan even if the funds that you receive won't help create jobs.

Your main goal should be to identify how your company can help improve the local economy, which means that you may need to provide a business plan when sending in your application.

504 Loan Uses

In order for your business to qualify for this type of loan, you will need to use it for one of many different uses, which include:

  • Purchasing existing buildings or land that you would like to use to develop a building
  • Purchasing machinery or equipment
  • Building new facilities
  • Purchasing improvements like parking lots or utilities
  • Refinancing some of your existing debt that was used to pay for fixed assets
  • Remodeling or renovating an existing property

If you want to renovate or purchase a building with this loan, your company will need to occupy at least 51 percent of the building that the loan is being used for. If you're creating an entirely new building, you will need to occupy at least 60 percent of the building when it opens, which must increase to 80 percent within 10 years. If the loan is being used to purchase machinery or equipment, anything you purchase must have an estimated life of at least 10 years.

SBA 504 Loan Rates, Fees, and Terms


When you're about to apply for a loan, it's very important that you understand the loan rates, fees, and terms that are involved.

  • The interest rate of a loan refers to a small percentage that's charged on top of the loan principal. For instance, you may be required to pay a five-percent interest rate on a $100,000 loan.
  • Loan fees are extra fees that could be charged annually or as upfront costs. The loan repayment terms dictate how long you will have to pay back the loan in question.
  • These terms are important because they will determine how much your monthly payment will be and how long you have to repay the loan.

504 Loan Interest Rates

When you obtain this loan, you will have two interest rates to pay. The SBA has a fixed interest rate for the CDC portion of the loan. On the other hand, the bank will be able to set their own interest rates for the other portion of the loan. The calculations used for the CDC interest rates are somewhat complicated and are dictated by information that the National Association of Development Companies publishes every month.

The interest rates are usually lower than the rates available through a standard bank loan. The rates that you receive by the CDC are fixed for the life of the loan. As for the bank portion of the loan, the interest rates can differ substantially and may be either fixed or variable.

504 Loan Fees

There are five loan fees that you can expect to pay with this loan, which include:

  • Servicing fee - An annual fee that ranges from just over .6 percent to 2.0 percent
  • SBA-guarantee fee - An upfront fee of .5 percent of the loan amount
  • Processing fee - An upfront cost of 1.5 percent
  • Closing costs - Cannot be higher than $2,500
  • Funding fee - While this fee can change, it's currently .25 percent

504 Loan Repayment Terms

These loans have very long repayment terms, which lessens the risk that you need to take on. If you're purchasing equipment or machinery, the repayment term is 10 years. The purchasing of land or a building comes with a repayment term of 20 or 25 years, which gives you ample time to repay the loan. Longer terms also equate to much lower monthly payments.

Benefits for Your Business


These loans can benefit your business for a myriad of reasons, which include both immediate and long-term benefits.

These benefits extend to:

  • Having fixed-rate interest rates
  • Having an improved cash flow
  • Long repayment terms without any balloon payments
  • 90 percent financing, which keeps down payment requirements to a minimum

Your small business or startup can benefit from this type of loan because it allows you to grow and gain a footing in your industry if you've been unable to obtain other aspects of financing. Most of these loans have very low interest rates. Because of the lengthy repayment terms, you also don't need to be worried about repaying the loan immediately. These loans are also ideal for big businesses because they allow these companies to make sizable investments in their future of up to $20 million.

Applying for SBA 504 Loan Program

close up text of application on table

If the SBA 504 loan program seems appealing to you and is something that you're interested in, applying for one of these loans is relatively straightforward. You need to find a CDC that wants to provide funding for their portion of the loan as well as a bank that's able to accommodate the other 50 percent of the loan. The majority of regional and national banks can work on these loans. If you currently use a bank for your business banking, inquire about potential support for an SBA 504 loan. Most banks are also able to recommend CDCs that they've worked with in the past, which should make the application process easier.

The SBA website offers a tool that allows you to search for local CDCs if necessary. Once you've found a bank and a CDC, the paperwork can be extensive and the process lengthy.

The documentation that you'll need to provide includes a debt schedule, your business plan, tax returns, financial statements, and bank statements. While it can take months to get through this process, it's likely that the long repayment terms and low interest rates are worth it.

Contact University Lab Partners for Help!

The University Lab Partners facility can also be a great resource for you when you're working on the loan or need some short-term office space. With the provision of a flexible workspace as well as high-end shared resources and amenities, you can perform your work while waiting for your loan application to be approved. Apply now if you're interested.


Revised 11/18/2020


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