SBA 504 loans are small business loans that are partially guaranteed for the lender by the U.S. federal government. This is handled by the Small Business Administration (SBA), which is a federal agency intended to promote small business success in America.
504 loans are actually two loans, one by a non-profit Certified Development Corporation (CDC) and the other by a third-party lender, usually a bank (See below for information on the split between loans). As long as the lenders follows SBA guidelines, the SBA will guarantee the entire CDC loan, and while the third-party lender’s loan isn’t guaranteed, the third party lender does have the first deed of trust on the real estate involved. These mechanisms greatly reduce the risk of a 504 loan, allowing lenders to provide loans to a wider array of borrowers.
Loan Amount
Up to $12,500,000
Down Payment
Minimum (and typical) down payment of 10%
Interest Rate
Either variable or fixed, with rates usually between prime + 1 and Prime + 3.
Term
25 years for most loans, 10 years for equipment loans
Collateral
Typically just the real estate involved
Personal Guarantee
A full personal guarantee is required
Amortization
Fully amortized
Prepayment Penalty
Period of 10 years, pegged at debenture rate and descending by 10% a year
Fiscal Year 2024
5,993
504 Loans Approved
$6.6 Billion+
Total Value of Approved 504 Loans
Valid Uses of Proceeds
A 504 loan can be used in a variety of ways, with eligible uses of proceeds including:
– Real estate purchase
– Real estate or building improvements
– Construction
– Equipment purchase
– Debt refinance*
504 loans can’t be used for real estate investment, either commercial or residential. If a 504 loan is used to purchase real estate, it must be with the primary purpose of operating a business on the premises. However, the owner may still rent out up to 49% of the property.
*Only refinances with most (generally >75%) of the value being real estate, equipment, or construction loans are eligible
Business Eligibility
504 loans can be used for almost any kind of for-profit business. Some common industries for 504 loans include:
– Retail Stores
– Restaurants
– Hotels/Motels/B&Bs
– Gas Stations
– Convenience Stores
– Storage Facilities
Splits Between Loans
SBA 504 loans are in fact two loans: a CDC loan and a third party lender loan. The standard project funding split between them and the down payment is 10% down payment, 40% CDC loan, and 50% third party loan. However, these proportions can change depending on two factors, including whether the business is a startup and whether the real estate is a limited or special use property. These factors lead to a larger required down payment from the borrower.