SBA 504 Loan Program

The SBA 504 loan program is one of the SBA’s more popular small business loans for small businesses that are looking to purchase major fixed assets such as land, commercial property, or major equipment.  These SBA loans are long term fixed rate loans offered by Certified Development Companies (CDC’s).  A CDC is a private non-profit organization that is dedicated to the economic development of it’s community.  CDC’s work with the SBA and private small business loan lenders to provide financing for small business. 

SBA 504 loans are not for working capital but for fixed asset projects such as property, commercial real-estate, and major equipment

In order for a small business to be approved for an SBA 504 loan you must be able to prove to the CDC’s, SBA and SBA qualified lender that you are a low risk small business borrower.  To be a low risk small business borrower you must have a good business credit score with the three main business credit reporting agencies, a professionally written SBA certified business plan, and a business loan application with proper financials.  With all three of these, being approved for an SBA loan is going to be extremely tough.

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How SBA 504 Loan Funds May be Used
The money you will receive from be approved for a SBA 504 loan can be used in three main ways:

 - Purchasing land, improvements to land, commercial buildings, streets, parking garages, and utilities.
 - Construction of new facilities or the modernization of existing facilities.
 - Purchasing long-term machinery or equipment.

SBA 504 loan funds cannot be used for working capital, refinancing purposes, or paying off debt.

Eligibility
In order to eligible to be approved for an SBA 504 loan your business must be a for profit business and fall within the size limits created by the SBA.  Based on the SBA guidelines, a small business is qualified as small if it has a tangible net worth of less then $7.5 million and does not have a average net income in excess of $2.5 million after taxes for the processing two years.  These loans cannot be made to businesses that are looking to have investment or rental properties.

Interest Rates and Fees
SBA 504 loan interest rates are based on what each CDC lender underwriting guidelines are.  They are usually pegged above the standard market business loan rates for 5 and 10 years US Treasury issues.  Fee’s are a total of 3% of the debenture and if approved may be financed within the loan.

Getting Started With a Loan From the Small Business Administration

What it is: These are U.S. government-backed term loans that are available at most banks and commercial lending institutions In any given year, the SBA can guarantee tens of billions of dollars-worth of loans that support tens of thousands of small businesses.

The SBA’s primary lending program -- the 7(a) Loan Program -- guarantees as much as 85 percent of loans up to $150,000 and 75 percent of loans of more than $150,000. The maximum loan amount is $5 million.

Loan terms can last up to 25 years for real estate, up to 10 years for equipment (as long as the equipment is likely to stay useful during that time) and usually up to seven years for working capital. Interest rates are also competitive because the SBA limits the interest rate spread that banks are able to offer on the loans.

Upside: The SBA guarantee gives banks some comfort room to approve loans or allow borrowers to repay loans over a longer period of time. You might want to consider an SBA loan if you are looking for a loan with a longer term and lower payments -- or have loan application barriers related to inadequate collateral or limited operating history.

Downside: Even though the SBA has tried to make it better, the time-consuming paperwork and red tape surrounding SBA loans is legendary. You might move mountains and still not prove that you have the cash flow required for a 7(a). One potential solution might be to find a bank participating in the SBA Express program, which promises a 36-hour turnaround in return for only guaranteeing half of a loan’s value. The maximum loan amount of $350,000 is also a fraction of the 7(a).

How to get it: Large U.S. banks such as San Francisco-based Wells Fargo and Minneapolis-based U.S. Bank are also some of the most active SBA lenders.

However, it might be worth it to check out local community banks with a focus on business lending. Such banks are a good bet in general for businesses financing because they have more leeway when it comes to approving loans, and their officers can be a wellspring of business financing advice.

Related: How Community Banks Are Wooing Small-Business Customers

Want to find a bank with a niche in SBA lending? You can find out which area banks have the highest SBA loan volume by doing a search on the SBA website.

While shopping around among banks, ask them if they belong to the SBA’s Preferred Lenders Program, in which the SBA delegates much of the decision making and loan servicing to banks that have shown themselves proficient in processing SBA-guaranteed loans. Such banks will have more SBA loan expertise, and should hopefully be able to better navigate the paperwork with you.

Related: A Cluster of Clusters: Where the SBA Is Investing in Regional Economies

While 7(a) is the SBA’s primary loan program, the agency supports other types of small business financing:

The CDC/504 Program provides long-term, fixed-rate financing for businesses acquiring new facilities or modernizing existing locations. The SBA designates particular nonprofits as Certified Development Companies (CDCs) that are able to provide CDC/504 loans -- entirely guaranteed by the SBA -- for 40 percent of project costs. The limit on the SBA’s portion is $5 million. Private sector lenders finance half of the cost of the project, with the business kicking in 10 percent out of pocket.