SBA 504 Loan: Everything you need to know

Stu Little
sba 504 loan commercial real estate
Published on September 19, 2022

Interested in purchasing commercial real estate with an SBA Loan? Get all the facts and consider your options.

Owning your business property is a great way to improve sales, marketing, and community connections. However, it’s easier said than done. Of course, purchasing a property is expensive. Plus, the location you pick for your company can make or break your sales, leaving you with few affordable options. Perhaps for your business, you can only purchase an office by receiving a loan. The good news is there are an incredible amount of options out there for loans. If you do your research, you’ll be able to find the perfect opportunity for you and your business.

In this blog, we’ll discuss how the SBA 504 loan is an excellent option for smaller businesses that would like government support to help them purchase real estate. We’re explaining an SBA 504 loan, how it works, the loan requirements, and how the application process operates. 

What Is A SBA 504? 

The Small Business Administration (the SBA) created a 504 loan to help businesses grow and expand through purchasing real estate and other fixed assets. Certified Development Companies (CDC) approved by the SBA complete and issue these loans. That’s why they’re also known as a CDC 504 loan.

If you’re a small business looking for financial help to purchase your first piece of real estate, this governmentally approved and issued loan is a great option to consider. However, because the process is more strenuous and time-consuming than other loans, this is not a good option for businesses that need quick access to sizable sums. 

What Are the SBA 504 Loan Details?

Below are the loan details for the SBA 504 loan. If this information sounds like just what you need to purchase your dream commercial property, then consider applying.

  • SBA 504 loans run for ten years for machinery and equipment purchases and 20 years for real estate. 
  • They’re $5 million loans for small businesses and $5.5 million for small manufacturers. 
  • Fees include an upfront guarantee fee of 0.50% of the loan amount. They also have an annual service fee, 0.2475% of the outstanding balance, and lender-specific fees. 
  • Interest rates are above the five- and 10-year U.S. treasury rates, usually about three percent of the total debt. 

Loan Requirements for the SBA 504 Loan 

It’s important to note that even if you meet all the requirements below, the SBA only gives 504 loans to those not approved for other types of loans. If you can receive financial help elsewhere, this type of loan isn’t for you. 

Here are the requirements needed for an SBA 504 loan:

  • Business is worth $15 million or less. 
  • The average net income for the past two years is $5 million or less after income taxes.
  • The company is not involved in lending. 
  • Must repay the loan from cash flow created by the business that requires the loan.  
  • Business is for-profit. 
  • Have not purchased and then held real estate. 
  • Personal histories of all principles in your company are available when applying. 
  • Business is not involved in any political or lobbying work. 
  • Must occupy at least 51% of the building if it’s existing or 61% if it’s new construction. 
  • The business hasn’t defaulted on a federal loan. 
  • Not engaged in passive or speculative activities. Passive activities include any business activity you don’t participate in, such as leasing equipment or renting homes. Speculative activities include buying things you hope to resell for a higher profit. 
  • Business meets current SBA business size requirements
  • Must have a feasible business plan outlined. 
  • The company is not involved in any gambling. Sadly, if you run a casino and need a loan, the SBA won’t approve your 504 loans.

How Do You Apply for an SBA 504 Loan?

If you’re hoping to apply for an SBA 504 loan, know the process is unique to the other methods for different SBA loans. For the 504 loans, you’ll have to work with a Certified Development Company (CDC) private lender on top of an SBA-backed lender. 

Select a CDC nonprofit organization to help back your loan to kick start the process. To make it easier, here’s a list of all the CDCs. Search for an option that works in the same field as you or one with values that align with your company.

Once you’ve found a partner, it’s time to pre-qualify for the loan. Luckily, this doesn’t require a hard credit check or any other risks for you and your business. Prequalification, however, allows you to get ahead of other loan competitors and can secure the property before you even apply. It’s a win-win. 

Following pre-qualifying, submit your loan application. You can find the application here. Once you’ve filled it out, it takes the SBA up to one week to make a lending decision. Following, the loan may take about one to two months to close out officially and for you to receive the funds. 

Loans May Not Be the Best for Your Business: Consider Your Options 

Loans can be tricky. Not only are they stressful and time-consuming to research and then apply for, but they’re also expensive. They may not be the best investment in your business’s future right now. If you’re on the fence about an SBA 504 loan or a loan in general, consider researching other processes that might help you purchase real estate to help your business reach its full potential.

For example, withco focuses on helping small businesses lease-to-own properties in the local communities they thrive in. Lease-to-own helps businesses avoid the expensive down payment required for a 504 Loan. 

Want to learn more about lease-to-own?

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