SBA 504 loans

What is an SBA 504 loan?

A 504 loan is really two loans and a down payment. A bank or credit union lends 50% of the project in first position at its own rate. A Certified Development Company, a nonprofit licensed by the SBA, lends 40% in second position, funded by an SBA backed bond with a fixed rate for the full term. You contribute the remaining 10%.

The money must go to fixed assets: buying, building or renovating owner occupied property, or equipment with a useful life of ten years or more. Working capital and inventory are not allowed; for those, see the SBA 7(a) loan.

Who qualifies for an SBA 504 loan?

Most 504 borrowers are established businesses with two or more years of profitable returns, owner credit of 680 or higher, and cash flow that covers the new payment at a DSCR of 1.25 or better. Your business must occupy at least 51% of an existing building, or 60% of a new build, and fit the SBA size limits on net worth and net income.

• Startups and special purpose buildings (hotels, gas stations, car washes) need 15% to 20% down instead of 10%.
• Declined most often: a loss on the last return, unpaid taxes, and projects where rent from other tenants is the real source of repayment. Passive investors should look at commercial real estate loans instead.

What does an SBA 504 loan really cost?

A typical example: you buy a $1,000,000 building. The bank lends $500,000 at 8% over 25 years, about $3,860 a month. The CDC lends $400,000 at a fixed 6.5% over 25 years, about $2,700 a month. You put in $100,000. Total payment is roughly $6,560 a month, and because the CDC portion is fixed, only the bank half can move with rates.

Fees on the CDC portion run about 2% to 3% of the loan and are financed into it. You will pay an appraisal, usually $2,000 to $5,000, an environmental report, title and legal costs. Compare the full cost against a 7(a) with the SBA loan calculator.

How do you qualify, and what documents do you need?

Two lenders underwrite you, so expect to produce the file twice. The core is three years of business and personal tax returns, interim financial statements, a debt schedule, a personal financial statement for each 20% owner, and the purchase contract or construction budget. Equipment projects add vendor quotes. Buildings add an appraisal and often a Phase I environmental report, which the CDC orders.

Start with our document checklist, and read DSCR explained before you apply, because the lender will calculate it from your last return and the proposed payment. If it is under 1.25, add a larger down payment or negotiate a lower price first.

How long does an SBA 504 loan take?

Typically 45 to 120 days from a complete application to closing, longer than a 7(a) because the bank and the CDC each approve separately and the SBA then authorizes the debenture. New construction adds months, since the CDC portion funds only after the building is complete, with the bank carrying an interim loan until then.

The appraisal and environmental report are the usual bottlenecks, each taking two to four weeks. Order them as soon as you have a signed purchase contract. Our guide to how long business loans take covers the rest of the timeline.

When should you choose something else?

Choose an SBA 7(a) loan if the project mixes real estate with working capital or a business purchase, since 504 cannot fund those parts; our 7(a) versus 504 comparison works through a mixed project. Choose a conventional commercial real estate loan if you can put 20% to 25% down and want to close in 45 days with less paperwork, or if the property is an investment rather than your operating location.

Choose equipment financing for a single machine under about $500,000. It closes in days, and the 504 process is not worth the wait at that size.

How do you apply for an SBA 504 loan?

Apply once on this site and your application reaches 504 lenders and CDC partners in your area, alongside conventional real estate lenders so you can compare the two. It is free for your business, and we are paid the same whichever lender you choose. Or ask your AI assistant to apply through our MCP server: it can read your returns and statements, fill the application and submit it, and offers come back to one place.