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SBA 504 Loans: The Essential Guide

SBA 504 Loans - The Essential Guide

The Small Business Administration (SBA) is a federal government agency that oversees various loan programs. SBA loans are often considered the “gold standard of small business financing.”

There are several types of SBA loans. Finding the right one for your business depends on how much you need, how you intend to use the money, how fast you need the money, and other information about your company and industry.

The 504 loan program consists of SBA loans intended to promote business growth in local communities. If you’re a small business owner trying to decide if an SBA 504 loan is right for you, we can help with answers to these questions:

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    What are SBA 504/CDC Loans?

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    SBA 504 loans – or CDC/504 loans – are a specialized subset of the SBA loan program that provides long-term financing for major fixed assets that promote business growth. 504 loans also require working with Certified Development Companies (CDCs) and a third-party lender (TPL) to process the application and receive funding.

    CDCs are the SBA’s community-based partners who regulate nonprofits and promote economic development within the community. Small businesses partner with CDCs to obtain funding for long-term major fixed assets that encourage job creation and business growth.

    Loan amounts range from $125,000 to $5 million. Loans can go up to $5.5 million for special energy products but cannot exceed $16.5 million for three such projects.

    Repayment terms run between 10 and 25 years. In standard 504 loans, the funding breakdown goes as follows:

    How Can I Use 504 Loan Funds?

    One of the distinguishing features of the 504 loan program is how borrowers are allowed to use the funds. The program states that the funds must be used for long-term projects to help create jobs or contribute to business development.

    Examples of how borrowers can use the funds include the purchase or construction of:

    • New facilities.
    • Equipment and machinery with long-term use.
    • An existing building, land, or other fixed assets.

    In addition, borrowers can use the funds to repair or update existing facilities, land, street, utilities, parking lots, or landscaping.

    Unlike other SBA loans, borrowers cannot use the funds for:

    As with most SBA loans, the funds cannot be used for speculation or rental real estate.

    If you use the loan to create jobs, you must make one for every $65,000 borrowed. Manufacturing businesses must create one job for every $100,000 borrowed. Your borrowing limit will be $5 million.

    If you use the loan for something related to public policy (i.e., business district revitalization, minority business development, expansion of women-owned businesses), your borrowing limit is $5.5 million.

    Lastly, if you own a small manufacturing business, you must create or retain at least one job per $100,000 guaranteed by the SBA. Your loan must also be used for purposes related to public policy. If you meet these criteria, your borrowing limit will be $4 million.

    What are the Costs of SBA 504 Loans?

    The interest rates for 504 loans are “pegged to an increment above the 5- and 10- year Treasure rates.” In most cases, the total interest on the loan works out to 3% of the loan amount or an APR of 5%-6%. The interest rate structure gets fairly complicated, and your lender can provide you with more exact details.

    504 loans also come with fees generally deducted from the loan. There is a guaranty fee of 0.5% of the loan amount and an annual service fee of 0.25% of the loan amount.

    Lenders might charge additional fees. However, the SBA does not allow lenders to charge application or origination fees, and total fees can’t exceed 3% of the loan total.

    Borrowers who prepay a loan in the first half of the term are subject to a prepayment premium, essentially a prepayment penalty. There is a specific formula for the prepayment premium, which the lender can provide.

    If you pay the loan off in the second half of the term, there is no prepayment fee.

    Is My Business Eligible for the 504 Loan?

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    Another aspect of 504 loans that sets them apart from other SBA loans is the specific eligibility requirements. Most SBA loans require applicants to be for-profit businesses operating in the US that meet the SBA’s size requirements and have good to excellent credit scores (minimums are usually 650-680 depending on the lender).

    504 loans are no different, but the business must also have the following:

    • A tangible net worth of less than $15 million.
    • An average net income of less than $5 million for the last 2 years (after federal income taxes).
    • Qualified management experience.
    • A feasible business plan.
    • The ability to repay the loan (determined by cash flow).

    The SBA also excludes certain businesses, such as:

    • Gambling businesses and casinos.
    • Nonprofit corporations.
    • Passive or speculative businesses.

    Applicants must also meet a “credit elsewhere” test, which determines the company cannot get financing elsewhere. SBA loans are considered a loan of “last resort.” If you’re still unsure if your business is eligible, you can contact an SBA-approved lender for more information.

    How To Apply for an SBA 504/CDC Loan:

    All SBA 504 loans start with finding a Certified Development Company (CDC) in your area. You can use the SBA’s CDC locator tool to find one close to your business. You will work with CDC to prequalify and determine the amount your business is eligible for under the CDC/504 program.

    Once you find a CDC, you can begin working on your loan application and applying to a lending institution or marketplace. You can apply through United Capital Source by following these steps.

    Step 1: Prepare Your Proposal

    When applying, you must include a proposal outlining the total project cost and how you intend to use the funds. The proposal should identify the equipment, real estate, or other business assets you intend to purchase. You might need formal quotes from the contractors or the real estate holding company.

    Step 2: Gather Your Documents

    You can get a complete list of the required documents from the SBA’s 504 Authorization Library. It would be best if you were prepared to provide the following:

    Step 3: Submit an Application

    Once you’ve prepared your document, you can complete a formal 504 Loan application. Our loan experts can help you prepare the application, including the necessary information for the third-party lender. You will apply to both the lender and your preferred CDC.

    Step 4: Await Approval

    It might take up to one week to receive for the SBA to make a lending decision. The application then enters a due diligence period, which could last up to three weeks. During this time, the CDC or lender might require additional documentation.

    Step 5: Close the Loan and Get Funded

    The average time to close an SBA 504 loan is one to two months, but it could take longer for larger purchases or complex funding arrangements. You will receive the loan funds once it closes.

    SBA 504 Loans, Post Funding:

    The loan agreement will outline the repayment schedule, including the repayment start date. Terms are typically 10-20 years, so the monthly payment should be manageable.

    Approved businesses must also comply with rules and regulations post-funding. A company must report any changes in ownership or if it intends to use the acquired asset(s) as collateral to secure another loan.

    Additional reporting requirements include:

    • Proof of paying taxes.
    • Proof of hazard insurance.
    • Proof of key person insurance.
    • Financial responsibility.

    What are the Advantages of SBA 504/CDC Loans?

    SBA 504 loans provide businesses with large funding amounts to invest in equipment, real estate, or other large asset acquisitions. Since the SBA partially guarantees the loans, borrowers typically get low interest rates, fees, and extended repayment terms.

    In addition, 504 loans help promote economic growth in local communities. The partnership with a CDC helps ensure the funds help the business and the community.

    What are the Disadvantages of SBA 504/CDC Loans?

    The main drawbacks of 504 loans are the strict eligibility requirements and the use of funds. The program is intended to serve community development and business funding, so applicants must prove how the loan will accomplish both objectives.

    Since the usage and purpose are so restrictive, 504 loans require extensive documentation and a rigorous underwriting process. Those aspects also mean businesses often have to wait 30-60 days, sometimes longer, to receive funds.

    Pros & Cons


    • Loan amounts to $5 million, or $5.5 million, for certain projects.
    • Loans can fund up to 90% of large-scale development projects.
    • Long repayment terms.
    • Fees cannot exceed 3% of the loan amount.
    • Low, fixed interest rates for the entire loan term.


    • Complex qualification and application requirements.
    • Competitive loans.
    • Requires extensive documentation.
    • Closing the loan can take 60+ days.
    • Strict use of funds.

    Frequently Asked Questions

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    Here are the most common questions about SBA 504 loans.

    Do SBA 504 Loans Require Collateral?

    In most cases, the asset(s) you use the funds to acquire serve as collateral, and no additional collateral is required. However, any business owner with a 20% or greater stake must sign a personal guarantee.

    Are There Other SBA Loans?

    Yes, 504 loans are a niche subset of the SBA loan program. Other SBA loan programs include:

    What if I’m Not Eligible for an SBA 504 Loan?

    While SBA Loans are the most advantageous small business loans, they are far from your only options. Many alternative lending platforms provide various loans with much looser requirements and significantly faster funding times.

    Small Business Loans

    You could consider any of the financing options:

    SBA 504 Loans Final Thoughts

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    As you can see, SBA 504 loans are complicated and only applicable in certain circumstances. If your business qualifies and you need funding for the specific uses outlined in the 504 loan program, it could be your business’s most advantageous loan option.

    On the other hand, if you don’t meet the eligibility requirements, have different funding needs, or need the money in fewer than 60 days, 504 loans are not an option for you. If you want to pursue an SBA loan or another form of business financing, contact us to discuss your options.

    We will help you grow your small business.

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        At UCS, we understand the value of your time and want to ensure that your application has a great chance of approval. Please take note of the following details before applying:
        • To be eligible, it’s necessary to have a business bank account with a well-established U.S. bank such as Chase, Wells Fargo, Bank of America, Citibank, or other major banks. Unfortunately, online-based bank accounts like PayPal, Chime, CashApp, etc., are not permitted.
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