What is an SBA 504 Loan?

The US Small Business Administration (SBA) 504 Loan Program is a financial instrument that allows small businesses to purchase fixed assets with government-guaranteed loans. Program loans can be obtained through a combination of financing from an established lender, such as a bank, and a Certified Development Corporation (CDC). The CDC is a community-based, not-for-profit organization that receives federal funds to support economic development in specific regions. Businesses do not take loans from the SBA. Instead, it guarantees loans made by private companies, such as banks, in case of default. When a small business defaults on a loan, the SBA repays it to the lender, so the lender has no reason not to take the loan because there is no risk of loss. The SBA governs the program by setting eligibility requirements for warranties.

SBA 504 Loans are available for small businesses to purchase capital or fixed assets. Fixed assets are tangible business property such as real estate, manufacturing plants and major equipment that have a useful life beyond the current accounting period. The goal of the program is to modernize and expand small businesses and stimulate the nation’s economy. Only for-profit small businesses with a net income of less than $2.5 million (USD) and a net worth of less than $7.5 million are eligible for an SBA 504 loan. The program also screens owner businesses that are ineligible for an SBA 504 loan if their tangible personal net worth exceeds $15 million. This is to prevent wealthy owners from using government-backed funds designed for businesses that cannot get loans without a guarantor, rather than investing their own money in their businesses.

The business must be able to pay at least 10% of the acquisition cost, and more if the business is less than two years old or the asset is classified as special purpose. Traditional lenders can offer up to 50% of the purchase price. The CDC offers up to 40% of the cost. Both traditional and CDC loans are guaranteed by the SBA. The maximum amount you can borrow on an SBA 504 loan depends on the goals the government has set for the program. For example, a business can borrow up to $1.5 million if the asset helps the business create jobs. If the business is a small manufacturer, it can borrow up to $4 million. The amount by which the eligibility threshold can be borrowed, funding goals and targets change each time the legislation funding the program is updated.

Am I eligible?

To qualify for a SBA 7A Loans, your business requirements must be:

  • Operating as a for-profit corporation in the United States or its territories
  • Tangible net worth less than $15 million
  • Have an average net income after federal income tax of less than $5 million in the first two years of filing
  • Other general eligibility criteria include meeting SBA size guidelines, possessing qualified management expertise, a viable business plan, good character, and the ability to repay loans.

It is not allowed to provide loans to businesses engaged in non-commercial, passive or speculative activities. For more information on eligibility criteria and loan application requirements, small businesses and lenders are encouraged to contact certified developer companies in their area.

How do I use a 504 loan?

504 loans are available for a range of assets that promote business growth and job creation. These include buying or building:

  • Existing buildings or land
  • new facility
  • long-term machinery
  • Either improve or modernize:
  • Land, Streets, Utilities, Parking and Landscaping
  • existing facilities

504 loans cannot be used to:

  • working capital or inventory
  • Consolidate, repay or refinance debt
  • Speculation or investment in rental real estate
  • What do I need to apply for?
  • 504 loans are only available through a Certified Development Company (CDC). First, find the CDC in your area to make sure you’re dealing with a qualified lender.

Then start preparing and assembling your 504 loan authorization package, using the 504 authorization document library to determine the documents you need to apply for a 504 CDC loan.

How do I pay off my 504 loan?

Loan repayment terms vary based on several factors:

  • Repayment terms
  • 10-year and 20-year maturities available
  • interest rate
  • Linked to current market rates on 5-year and 10-year U.S. Treasuries
  • A total of about 3% of debt, interest rate can be financed by loan

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