While once an under-utilized source of capital, a.k.a. “the best kept secret in commercial financing”, entrepreneurs are discovering SBA 504 loans are a way to level the playing field when financing an expansion of their business.


Many Are Unfamiliar With One of SBA’s Best Financing Options

If you are a small business owner, you are probably familiar with the U.S. Small Business Administration (SBA), but, unfortunately, many are unfamiliar with one of its best options for capital.  The SBA established a program over 30 years ago called the 504 Loan Program.  This program works in conjunction with your bank to allow business owners to receive up to 90% financing for the acquisition, construction, improvement or expansion of commercial property or for acquiring heavy machinery or equipment. The program essentially consists of three key elements:  50% of the project’s total cost is provided by a lending institution, usually a bank; 40% is provided through the SBA’s 504 Loan Program; and 10% equity is provided by the borrower.  (Start-up businesses and single-purpose facilities require a slightly higher equity contribution.)  By requiring a smaller down payment, the 504 can help the business conserve their operating capital, while the structure of the program makes it attractive to financial institutions.  Plus, the fixed rate and long loan term insulates borrowers from rising interest rates and future balloon payments or call provisions. With 90% loan-to-cost financing for most commercial real estate projects (inclusive of land, existing building, ground-up construction, furniture, fixtures, equipment, soft costs and closing costs), SBA 504 loans are a very powerful tool, yet they remain under-utilized because many small business owners just aren’t aware this financing option exists.  Last year, 504 loans helped fuel about $5 billion in new capital investments for 6,200 businesses throughout the U.S. The Secret is Out - SBA 504 is King

What’s Eligible?

Most types of businesses are eligible to receive 504 financing.  Businesses with a successful track record can generally qualify for the 504 Loan Program if they are for-profit and average less than $5 million in annual profits and $15 million in net worth.  Qualifying projects should involve the purchase, construction or improvement of fixed assets such as land and building and/or the purchase of heavy machinery and equipment.  Projects that qualify must, according to SBA guidelines, promote economic development, which generally means the creation or retention of jobs.  The SBA’s participation is limited to $5 million, but there is no limit on the overall size of the deal.  The loan amounts increase to $5.5 million for businesses fulfilling one of the Public Policy goals.  

Advantages of the 504 Loan Program

Many advantages exist when a business chooses to utilize the 504 Loan Program:
  • The 504 has a long payback term.  Projects involving equipment have a 10-year term and real estate projects have a 20-year term.
  • Down payments are lower than utilizing a straight conventional source; in most cases a business only puts 10% down.
  • The interest rate on the 504 portion is fixed for the life of the loan.  This means there are no future balloon payments to worry about.
  • Lending institutions also benefit from utilizing the 504 Loan Program.  The lender’s risk is cut significantly because they finance only 50% of the project and have first lien position on the assets being financed.  The lender is free to set their rate on their portion of the loan and, because the lender is participating with SBA, it also meets economic development and community reinvestment goals.

What are Certified Development Companies?

Certified Development Companies (CDC’s), such as Growth Corp, administer the 504 Loan Program throughout the United States.  The various roles of a CDC include assisting businesses and lenders with qualifying projects for 504 financing.  In addition, they prepare and process a complete application, obtain approval from SBA and close the 504 loan.  Each state has at least one CDC and they can be found by visiting SBA’s website (www.sba.gov).  

Common Misconceptions

The SBA’s loan programs have been plagued with misconceptions.  The most common misconception is the length of time and paperwork required to get an SBA loan done.  However, 504 loans can be closed in a reasonable amount of time if the paperwork is ready to go.  The paperwork involved with 504 loans is not much different than what is required for conventional financing.  Finally, borrowers fear the fees associated with the program may be too expensive.  SBA just reduced fees, so 504 loans are more affordable than ever. By and large, use of the 504 Loan Program provides a financing solution that can ease business owners’ expansion concerns.  And, with recent program enhancements, the 504 is now able to help more businesses than ever before.  For more information, download our SBA 504 Expansion Guide or contact any member of our Lending Team. The SBA empowers Growth Corp to marshal the SBA 504 Loan Program to the entire state of Illinois and it’s surrounding areas. Focused exclusively on local economic development, Growth Corp has helped thousands of small businesses gain access to the capital they need, correlating to billions in 504 financing.