Access to capital is consistently one of the top challenges entrepreneurs and small businesses encounter, making the SBA 504 Loan Program a vital resource to economic growth and job creation. We’re happy to report SBA 504 lending is up 21% so far in Fiscal Year 2021…proof that quality capital is getting into the hands of entrepreneurs and small businesses are utilizing this smart financing source to grow and strengthen their businesses.
One of the SBA’s top goals to get more capital into the hands of entrepreneurs who would otherwise be unable to access loans at reasonable rates. The 504 Loan Program has seen increased performance so far this year, with more than 3,500 loans for a total dollar amount of $2.9 billion.
What are SBA 504 Loans?
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). SBA 504 loans feature 10- to 25-year terms, low interest rates, and down payments as low as 10%.
Sometimes it takes a big investment of resources to jump start growth for your small business. Maybe there’s special equipment that could save you money on labor and make you more productive. Or, you could be considering a building next door that would make a perfect addition to your shop. On the other hand, maybe your existing facility needs a serious face-lift. In each of these cases, an SBA 504 loan could be the perfect business financing solution. These loans are available to for-profit businesses to purchase real estate, equipment, and machinery. You can also use them to refinance existing commercial mortgage debt or to remodel existing facilities. SBA 504 loans are very business-friendly, requiring a down payment of typically just 10% and offering 10- to 25-year terms with low, fixed interest rates.
SBA 504 Loans: How Do They Work?
An SBA 504 loan can be used to purchase fixed assets or upgrade existing assets and is broken down into three parts:
- Bank loan (50%): A bank or direct lender extends 50% of the total loan amount.
- CDC loan (40%): An SBA-approved certified development company (CDC) (i.e. Growth Corp) extends 40% of the total loan amount.
- Down payment (10%): The borrower provides a down payment of usually 10%. Startups and special use properties have higher equity requirements.
The bank and CDC work closely together in issuing your 504 loan, but it’s important to remember that SBA oversees and regulates only the CDC component of the loan. Banks are free to set their own eligibility requirements and terms for the bank portion of the loan.
Maximum loan amounts on the CDC portion of the loan are $5 million, extending up to $5.5 million for green energy companies and manufacturing businesses.
SBA 504 Loan Requirements
In order to qualify for this type of financing, you’ll need to meet the following SBA 504 loan program requirements:
- Meet the SBA’s size standards for small business, which differs based on industry
- Have a tangible net worth of no more than $15 million and an average net income of $5 million or less after federal income taxes for the two years prior to application
- Meet owner occupancy requirements
- Your project must create or retain jobs or promote other public policy goals
- Business must operate for profit and not be in a passive industry, such as real estate investing
The current jobs requirement stems from the SBA’s desire to fund businesses that are contributing to the economy. An alternative to the jobs requirement is to satisfy a public policy goal, such as any of the following:
- Improving, diversifying, or stabilizing the local economy
- Stimulating other business development
- Bringing new income into the community
- Assisting manufacturing firms
- Revitalizing a business district of a community with a written revitalization or redevelopment plan
- Expansion of exports
- Expansion of small business opportunities for women, veterans, and people of color
- Aiding rural development
- Increasing an industry’s productivity or competitiveness (e.g. STEM or health industries, competition with imports, etc.)
- Modernizing or upgrading facilities to meet health, safety, and environmental requirements
- Assisting businesses in or moving to areas affected by federal budget reductions
- Reduction of rates of unemployment in labor surplus areas, as such areas are determined by the Secretary of Labor
SBA 504 Loans: What’s Eligible?
To qualify for an SBA 504 loan, your intended use of the financing must be one of the following:
- Purchasing equipment or machinery
- Purchasing land or existing buildings
- Purchasing improvements (e.g. street grading, utilities, parking lots, etc.)
- Building new facilities
- Renovating, remodeling, or converting existing facilities
- Refinancing existing debt that’s being used to pay for fixed assets
SBA 504 Loan Program is up 21% so far in 2021, with more than 3,500 loans for a total dollar amount of $2.9 billion…proof that small businesses are utilizing this smart financing source to grow or strengthen their businesses.
SBA 504 Loans: Rates and Terms
One of the biggest benefits of an SBA 504 loan are the low interest rates and long terms. Since the loan is government-backed, the rates and fees on an SBA 504 loan are a lot lower than what you’re likely to find with a bank. SBA 504 loan interest rates are composed of two different interest rates—the rate on the CDC portion of the loan and the rate on the bank portion of the loan. The SBA sets standard, fixed rates for the CDC portion of the loan and a list of fees associated with 504 loans, along with when they are due, can be found here.
SBA 504 loans have long repayment terms, which is part of what makes them so beneficial for small business owners. In fact, one of the reasons SBA 504 lending is up in FY 2021 is the addition of a 25-year fixed rate loan term. A long repayment term translates to lower monthly payments for your business, which helps you conserve cash flow. SBA 504 loan terms depend on what you’re using the loan for. The term is typically 10 years if you’re purchasing machinery or equipment, and 20 or 25 years if you’re refinancing or constructing/purchasing/remodeling land or buildings.
How to Apply for an SBA 504 Loan
Once you decide to get an SBA 504 loan, it’s time to find a lender who can help. Since the bank and CDC are both involved in this process, you’ll need to find a bank that’s willing to work on the bank portion of the loan and a CDC that’s willing to work on the CDC portion of the loan.
Many national, regional, and community banks participate in the SBA 504 lending program and you can most likely stay with the lender you already use for your business banking. Alternatively, you can start by finding the CDC. The SBA’s website has a CDC finder tool, and the CDC should be able to direct you to a local bank. Larger CDCs have more experience with 504 loans and tend to offer faster processing. We always recommend working with an ALP (Accredited Lender Program) CDC as they usually have preferred processing with the SBA. Growth Corp is the largest CDC in the Illinois and one of the top ten in the Nation. We are a non-profit organization and have earned ALP status with SBA, allowing us faster processing of SBA 504 loans.
SBA 504 Lending is Up – But Will it Work For You?
Most for-profit businesses are eligible to receive 504 financing, so long as they average less than $5 million in annual after-tax profits and $15 million in net worth. Additionally, most national, regional, and community banks participate in the program so you can likely stay with the lender you already use for your business banking.
Whether you’re looking to access cash, control overhead expenses, or expand to meet increased demand, the 504 has you covered and can help pave the way forward. The 10% down payment is low compared to conventional loans. Plus, SBA 504 loans come with some of the lowest interest rates around.
Want to Learn More?
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.