reasons why SBA 504 loans are vital for small businessesWe’re here to give you 7 reasons why SBA 504 loans are vital for small businesses during fluctuating market conditions.  The purpose of all SBA loan programs is to provide businesses like yours with access to funding under reasonable terms…but, did you know, SBA 504 loans were specifically designed to help small businesses grow and strengthen?  To accomplish this, they extend financing with longer payment terms and competitive rates, keeping money in your pocket and stimulating the economy.

SBA 504 loans, guaranteed by the U.S. Small Business Administration, provide long-term financing for the purchase of real estate, equipment, and other fixed assets. There are three parties to an SBA 504 loan—the borrower, the bank, and the SBA-approved certified development company (CDC) (Growth Corp).  Check out some of the many reasons why SBA 504 terms are ideal for small businesses.


Below-Market, Fixed Interest Rates

The SBA second mortgage is a fixed rate tied to the 10-year Treasury, which is typically unaffected by market instability or inflation expectations.

Many people are asking where rates are headed.  The best indicator we have is to look back…please refer to the tabs or downloads on our Interest Rates History page.

The SBA does not set the interest rate on the bank portion of the loan; however, the interest rate on these loans tends to be very competitive.  One thing to keep in mind too…while SBA does not set the interest rate for the bank portion, it does set a maximum legal interest rate that a third party lender can charge, which is currently set at 6% over Prime.  Since the loan is backed by real estate, there is lower risk to the bank in not getting back the money it lends. This lower risk is reflected in a lower interest rate.


Longer 504 Loan Terms

The 504 rate has loan options of 10-years, 20-years, and 25-years. It is fully amortized through the life of the loan, meaning there is no balloon payment at the end of the term. This long term, below market rate provides small business owners with affordable monthly payments and enables them to control their overhead costs for the long term.  Consider what this would allow:

    • Use the money saved to strengthen your business without having to take on additional debt to do so
    • start a rainy-day fund
    • peace of mind with fixed, lower payments, especially in the face of rising operating expenses and interest rates

504 loans can be repaid early and under very favorable conditions, sometimes with no penalty. Being a unique program, the 504 has unique prepayment conditions as well. After the first half of the loan term has passed, the loan can be repaid early at no additional cost. That is, a 20-year loan can be repaid without penalty in the 11th year or later.

For the first half of the loan (or 10 years for a 25-yr term), the penalty is the debenture rate (typically under 5 percent) on the balance of the loan. That penalty is reduced by 10 percent each year, reaching zero at the term’s halfway point.


Lower Down Payments Preserves Cash

The low 10 percent down payment is one of the biggest attractions of the 504 Loan Program. Conventional loans often require a 20-40 percent down payment, an unattainable figure for many business owners. A lower down payment requirement opens the doors for many small business owners that otherwise couldn’t afford to purchase real estate or equipment. Certain circumstances require a down payment of 15 percent, such as when the loan is being used to purchase a special use property or if the business has been in operation for less than two years. However, this is still significantly less than conventional financing.

With the 504 loan’s low equity injection, businesses retain precious working capital. Renovations and soft costs can also be financed, allowing further cash savings.  In addition, 504 refinancing allows businesses to access the equity in their real estate and obtain cash for business expenses.


Streamlines or Increases Production

Whether your business is product or service based, having the necessary equipment is vital to maintaining smooth operations.  However, replacing, upgrading, or purchasing new equipment can put a serious pinch on cash flow.  A 504 Loan offers business owners a more affordable way to get needed equipment without making a substantial dent in the bottom line.

504 Loans are perfect for the purchase and installation of new or used, fixed, long-life machinery and equipment, such as:

  • X-Ray or Digital Imaging Machines
  • Manufacturing Equipment
  • Dry-Cleaning Equipment
  • Commercial Printers
  • Food Processing Machinery
  • Highly Calibrated Machines
  • Equipment that generates renewable energy

Using the 504 to Finance New Equipment…

The 504 Loan is perfect for the purchase and installation of new or used, fixed, long-life machinery and equipment, such as:

  • X-Ray or Digital Imaging Machines
  • Manufacturing Equipment
  • Dry-Cleaning Equipment
  • Commercial Printers
  • Food Processing Machinery
  • Highly Calibrated Machines
  • Equipment that generates renewable energy



Whether you’re just replacing a piece of existing equipment or buying a larger facility and stocking it with all new equipment, the SBA 504 has flexible financing options.

  • Machinery and equipment can be financed independent of real estate or in conjunction with a commercial real estate purchase.
  • Or, machinery and equipment can be financed in conjunction with a commercial real estate purchase
  • Loan terms of 10-, 20- or 25-years are available (term length is limited to the useful life declaration provided by the manufacturer)


Total Project Financing

The 504 loan is widely known as a commercial real estate loan, however it can be used for much more. Funds from a 504 loan can be used for:

  • Acquisition of real estate (land and buildings)
  • Acquisition and installation of equipment
  • Construction and renovation costs
  • Soft costs – the ability to include furniture, fixtures, and fees
  • Refinance conventional loans

There is no limit to the total project cost with a 504 Loan. The SBA portion (40 percent of the total project cost) is capped at $5,000,000 or $5,500,000 for manufacturing projects or projects that implement green efficiencies.


Mitigation of risk

By offering a guarantee, SBA greatly reduces the risk of lending to small businesses. This is especially helpful during economic downturns, when lenders are less likely to take on unnecessary risk. SBA loans also minimize risk for businesses due to their low rates, stable payment schedules and longer loan terms. Companies can save on interest over time and put cash back into growing their company.


Support from a Local Certified Development Company

According to SBA, “A Certified Development Company (CDC) is a nonprofit organization that promotes economic development within its community through 504 loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn accomplishes the goal of community economic development.”

Perhaps the most important aspect of CDCs is how tightly woven they are with the wider community, specifically the state in which they operate, and even the region surrounding the state in which they are headquartered. CDCs are designed to help strengthen local businesses by connecting them with quality financing for fixed asset investments (real estate or equipment), which, in turn, supports local economies, revitalizes neighborhoods, and breathes new life into local communities.

Certified Development Companies work in conjunction (not in competition) with local banks to offer financing through the SBA 504 Loan Program.  CDCs package and process loan applications through the SBA, and then close and service those loans once they’ve been approved.  Small business borrowers gain expert advice from the CDC on SBA 504 Loan terms, rates, uses, and structures. These recommendations are all incredibly beneficial to small businesses that are looking to finance their company’s growth and expansion.




Where Does 504 Loan Money Comes From?

Despite a lot of misconceptions, 504 Loans do not actually come directly from the SBA.  Instead, private investors—usually institutional investors such as pension funds, insurance companies, and large banks—buy your loan from the CDC in a monthly sale of SBA 504 loan debt.  That debt is a debenture.  Here’s how it works:  first, your CDC helps prepare your loan application and submits it to SBA for approval.  Once approved, the loan is administered by your CDC, guaranteed by the SBA, and, after completion of your project, is pooled and sold on Wall Street to investors.  The federal guarantee is a big selling point for the investors buying these debentures, since it makes the arrangement very safe for them—the loans have the “full faith and credit” of the U.S. government behind them.

The investors receive interest on the debt semi-annually, which comes from the interest you pay in monthly payments on your loan.  In order to attract investors, there is a negotiated interest rate spread over the Treasury rate. That is the interest the investors earn.  The size of the interest the investors receive is the debenture rate.  The debenture rate for the 20-year debenture pool in October 2021 was 1.54%.  Investors like 504 loan debentures because they pay a high rate by the standards of fixed-yield investments…higher than U.S. Treasury bonds but with the same level of safety.   Also, their rate hardly varies, and this predictability is another plus.


So, How Are SBA 504 Interest Rates Determined?

The exact interest rate on your loan is determined only after it has been funded…that is, after the sale of the debenture. While this may not immediately make sense, there is actually a simple reason for it…no one knows what the exact debenture rate will be until the sale actually takes place. The process of figuring this out goes like this:

The SBA has contracts with major financial institutions to handle the technical aspects of the loan process. The first of these is called the fiscal agent.  Eagle Compliance is responsible for the marketing, pricing and sale of the debentures sold to investors to fund the SBA 504 Loan Program. Representing borrowers’ interests, it reaches an agreement with the Underwriters on the sale price of the debentures, which will be expressed as an increment over the rate for Treasury bills. This is when the rate of your loan is determined.

Then, the Underwriter pays for the debentures with funds from investors. Those funds go to Wells Fargo Corporate Trust Services, the central servicing agent. They do the accounting and processing of all 504 loan payments. You’ll make your 504 loan payments to them. (Wells Fargo does not provide services directly to borrowers, so questions about your loan should always be addressed to your CDC’s servicing department.)

In October 2021, the bonds that were pooled to fund the 20-year 504 loans were sold to investors at 1.54%.  Fees for the program are added to the debenture rate, resulting in an effective rate of 2.77%, which is locked in for the 20-year lifespan of the 504 loan.

Keep in mind, the monthly interest rate for 504 loans is the same nationwide.  All CDC’s, and all 504 borrowers with loans funding in a given month, receive the same effective rate.

Keep in mind, the monthly interest rate for 504 loans is the same nationwide.  All CDC’s, and all 504 borrowers with loans funding in a given month, receive the same effective rate.

Is It One Monthly Payment or Two?

Borrowers make two monthly loan payments, one to the bank and one to the Central Servicing Agent.


Is Interim Financing Necessary?

Usually, yes, because there is often a delay between the closing and the funding of an SBA 504 loan.  Since the 504 loan is funded through a bond sale after the closing has taken place, the documentation of project completion must first be sent to the SBA District Office for submission in the next available bond pool.  Based on the date of closing and the submission schedule of the District Office, the time period could be as little as 5 weeks or up to two or three months, especially for 10-year 504 loans that only have bond sales every-other month.

In most cases, the bank involved in the project provides an interim loan and handles the disbursement of those funds for the project.  The bank also typically waits until the SBA has approved the 504 loan and issues a Debenture Authorization before they close on their interim loan.  With the bank covering the interim financing until the SBA 504 loan funds, they could be looking at up to a 90% loan-to-value (for 50/40/10 structures).  While the interim loan can have additional collateral tied to it to protect the bank, some banks might not want to have that high of an exposure even on a short-term basis.  In those cases, there are national non-bank lenders that specialize in providing the interim financing for a 504 loan.  While that ultimately might cost the borrower additional money for fees and higher interim interest rates, it is an alternative option.

Once the 504 loan funds, the money is wired to the bank (or non-bank interim lender) to pay off the principal amount of the interim loan.  The length of the interim financing depends on the nature of the project.  Turnkey projects typically involve the shortest interim financing period.  However, for ground-up construction projects, that interim financing period could last up to a year or even more.


Does the 504 Work Well for Borrowers?

Yes!  The system has been in place for more than 30 years and is finely tuned to create value for all those involved: investors have access to an attractive investment instrument, the SBA accomplishes their goals of providing funding and creating prosperity for small business and, best of all, borrowers get to grow their business thanks to easily accessible and affordable financing.  Thousands of small businesses have taken advantage of the SBA 504 Loan Program, correlating to billions of dollars.


How can a small business become eligible for SBA 504 financing?

To be eligible for the SBA 504 loan program, a small business must:

  • have fewer than 500 employees
  • be located in the United States
  • be a for-profit business
  • have a tangible net worth of not more than $15 million and average net income after taxes (two years prior to application) of not more than $5 million
  • be owner-occupied
  • if a manufacturing company, meet the definition of a small to mid-sized manufacturer as classified in the North American Industry Classification System, sectors 31-33.


How Can I Get Started?

Contact our team of qualified lenders, who are experts at helping small business owners get approved for SBA 504 loans that can help them compete, grow and succeed.

To understand how SBA 504 interest rates are determined and why they can provide borrowers with tremendous savings, it’s helpful to understand the three-part structure of 504 loans.

504 Loans typically offer 90% financing, with some variances for start-ups or special-use properties.

  • 50% of the total project costs come from a financial institution, usually a bank, and the bank gets first lien position on the assets.
  • 40% of the total project costs come from the SBA 504 Loan Program via a Certified Development Company (i.e. Growth Corp). The 504 loan is backed by a 100 percent SBA-guaranteed debenture and the CDC gets second lien position behind the bank.
  • 10% of the total project costs come from the borrower’s down payment.

The bank’s portion of the financing is offered with either a fixed or variable rate and is typically amortized over a minimum of seven years.  Bank rate, term, and fees are negotiable between the borrower and the bank.  The interest rates on the bank’s portion of the loan are not set by SBA.  However, because the bank gets first lien position and receives an SBA guarantee on approximately 40% of the loan, the bank’s rates tend to be lower than with conventional commercial loans.  It’s important to note…SBA does not provide a loan guarantee for the bank-funded portion of the financing.

The CDC’s portion of the financing comes with a fixed rate and a term of either 20 or 25 years for real estate and 10 years for equipment. The interest rate for this portion is determined when SBA sells the debenture to Wall Street investors to fund the loan.


About Growth Corp

Now that you know several of the reasons why SBA 504 loans are vital, let us tell you a little bit about us. Small Business Growth Corporation (Growth Corp) is a nonprofit, mission-based lender dedicated exclusively to connecting small businesses with quality expansion capital through administration of the SBA 504 Loan Program. With a commitment to economic development, job creation and the small business sector, Growth Corp is ranked a Top 10 National CDC for SBA 504 loan volume and is Illinois’ largest 504 loan provider.  In fact, Growth Corp’s substantial portfolio ($820+ million) is particularly impressive because every dollar was utilized by Midwest entrepreneurs to open and expand their small businesses.  Contact any member of our lending team today!