Two signs.  Red arrow pointing left says myths and the green sign pointing right says facts.  Grass, mountain, and blue sky behind.  Text says Debunking the myths of SBA 504 Loan Program.

In Fiscal Year 2022, more than 9,200 SBA 504 Loans were made to businesses nationwide, totaling $9.2 billion. Despite this incredible success, the 504 Loan Program remains under-utilized by lending organizations, possibly because of some erroneous misconceptions still floating around.


The U.S. Small Business Administration’s (SBA) 504 Loan Program is a proven small business lending initiative with numerous benefits. Although sometimes mistaken as a cumbersome loan of last resort, the program’s unique ability to mitigate risk and expand service to small business customers is offering it a well-deserved place in the spotlight.


An Overview of the SBA 504 Loan Program

The SBA 504 Loan Program is an economic development initiative administered by SBA. This public-private partnership provides a long-term, fixed rate lending solution for small business owners looking to buy, expand, or refinance major fixed assets – such as land, commercial real estate, or equipment. The program requires three key players:  a small business borrower; a Certified Development Company (CDC); and a lending organization, such as a bank or credit union.

SBA 504 loans are attractive to businesses because they offer a great opportunity for fixing occupancy costs with a long-term, fixed-rate loan and a minimal down payment.

Simultaneously, banks benefit because their risk is cut to a 50 percent loan-to-value ratio with a first lien on the assets financed.

In Fiscal Year 2022, more than 9,200 SBA 504 Loans were made to businesses nationwide, totaling $9.2 billion. Despite this incredible success, the program remains under-utilized by lending organizations, possibly because of some erroneous myths and misconceptions floating around.



MYTH:  The Program Competes with Banks

FACT:  504 Loans Require a Partnership Between Banks, CDCs, and Businesses

CDCs work in conjunction (not in competition) with local banks to offer financing through the SBA 504 Loan Program. The structure of this partnership offers lending organizations numerous benefits:

  • Ability to offer up to 90% long-term financing with low, fixed interest rates
  • Minimizes collateral risk; lending organization gets first lien position with an attractive 50% LTV
  • Lending organization makes its own credit decisions with its own loan documentation
  • Lending organization sets its rates and fees
  • Lending organization can earn fees and interest income on interim loans related to the project
  • Manages lending limits and industry exposure
  • SBA lending helps fulfill CRA, Rural and Public Policy goals
  • Offers a long-term option for financing heavy machinery and equipment
  • Attracts new clients with unique marketing opportunities


CDCs are your partner in SBA 504 Loans, not your competitor…you keep your clients! 


More than 200 CDCs operate the program nationwide, and each state has at least one. For a complete list, visit the SBA’s website (www.sba.gov).


MYTH:  SBA 504 Is a Loan of Last Resort

FACT:  SBA 504 is One of the Best Loan Products on the Market

Many successful business owners…from mom & pop organizations to large manufacturing companies… use SBA loans because of the unique benefits they offer, including:

  • Longer repayment terms – up to 25 years
  • Low, fixed interest rates
  • Lower down payments – typically just 10%
  • The ability to include furniture, fixtures, fees, and leasehold improvements
  • An option for long-term refinancing of commercial mortgage debt
  • Payment stability
  • Protection from balloon payments

Most types of businesses are eligible to receive 504 financing.  Businesses with a net worth of less than $15 million and a two-year average after tax net income of less than $5 million qualify for the 504 Loan Program. And, with the 504, there is no cap on the amount of the first mortgage loan provided by the lender. The cap on the 504 second mortgage is a generous $5 million ($5.5 million for manufacturing and green-energy projects).



MYTH:  SBA 504 Loans are Cumbersome and Time-Consuming

FACT:  SBA Lending Has Come a Long Way

SBA lending has come a long way in the last 10 years and most everything now is done electronically.  Turnaround times are typically less than a week once a complete application is received by SBA.  Furthermore, a new feature called ALP Express is further expediting the process.  This program provides delegated authority for Accredited CDCs to expedite the approval, closing, and servicing of 504 loans of $500,000 or less that meet the ALP Express eligibility requirements.

Plus, working with a CDC saves you valuable time because they package and process loan applications through the SBA, and then close and service those loans as a second mortgage once they have been approved.  You as the lender will generally process your portion of the loan as you would any other…and you get to keep an ongoing relationship with your client through your first mortgage.  Unlike the SBA 7(a) Loan Program, the 504 Loan Program does not require your bank to become an SBA-certified lender or have any previous experience with SBA lending.



MYTH:  SBA is a Direct Lender

FACT:  504 Loans do not actually come directly from the SBA

The SBA 504 Loan Program is funded through the sale of debentures that are fully guaranteed by SBA. Private investors that are looking for fixed income streams, guaranteed with the full faith and credit of the government, find this investment attractive. The source of program funding is entirely private. The Federal Government is a guarantor only. Program fees charged to the Program’s participants reimburse the Federal Government for any subsidy expense associated with the guaranty. This is a no cost program for the Federal Government and taxpayers.

The source of loan funds under the SBA 504 Loan Program is important to the Program’s existence. Most programs requiring continuing Federal subsidy suffer budgetary risks. The SBA 504 program is not such a program. Given that the source of funding for the program is private and that any Federal subsidy expense is reimbursed by the program participants, there has been little difficulty in raising support in Congress for this well accomplished economic development program.  In fact, the program has been operating successfully for over 35 years, with an extremely low default rate and a highly valued performance record.

Since 1986*, $126 billion in 504 loans have assisted roughly 210,000 businesses nationwide, creating 3.2 million jobs.


Overall, 504 loans benefit banks in numerous ways; including risk and liquidity management, fee and interest income, and customer retention. Given the current economic conditions, the 504 should not be seen as a loan of last resort, but as a great counter to increased margin spreads on conventional loans.  Its well-established framework and long track record of success makes it a powerful tool for your bank.


Want to Learn More?

Keep in mind, we work in conjunction with local banks…not in competition with them.

Why Growth Corp?  We know small business.  It’s our passion.  We are proud to have helped thousands of businesses facilitate expansion.  As the largest 504 Lender in Illinois, we have dedicated ourselves to making the 504 Loan Program as efficient and seamless as possible.  If you want to learn more, we would be happy to meet with you. Just give us a call at 877-BEST 504 or contact any member of our Lending Team.


Data source:  U.S. Small Business Administration · *1986 numbers are estimated based on available data.