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SBA 504 Loans -- How to Qualify and How Much You Can Borrow

Published June 7, 2024
Matt Frankel, CFP®
By: Matt Frankel, CFP®
Matt Frankel, CFP®
Matt Frankel, CFP®
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Matt is a Certified Financial Planner™ and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for The Ascent and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column ("Ask a Fool") that is syndicated in USA Today, and his work has been regularly featured on CNBC, Fox Business, MSN Money, and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.

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SBA 504 loans are a type of small business loan that is partially guaranteed by the U.S. Small Business Administration (SBA). While other types of SBA loans have flexible use cases, SBA 504 loans are generally designed to fund the acquisition of large assets, such as real estate and heavy equipment.

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How SBA 504 loans work

SBA 504 loans have repayment terms of 10, 20, or 25 years, and have fixed interest rates that depend on the 10-year U.S. Treasury interest rate at the time of origination.

The SBA 504 loan works differently than other SBA loan programs like the much more common 7(a) loan. Instead of coming from a third-party lender and having a guarantee from the SBA, the 504 loan comes from three parties:

  • A third-party lender, like a bank, provides 50% of the loan amount.
  • The SBA guarantees 40% of the loan, which comes from an economic development organization called a Certified Development Company (CDC).
  • The borrower provides 10% via a down payment, also known as an equity injection.

Note that these percentages can shift if the loan is being used to finance a new business and/or a special purpose property. A special purpose property is one that can only be used for a specific purpose, and therefore would be tougher to sell or re-lease in the event the bank had to foreclose. Think of properties like gas stations or movie theaters. In these cases, the down payment requirement can be 15% or 20%.

Because of their relative complexity, SBA 504 loans can take significantly longer to fund (30-90 days) than other types of SBA loans.

Qualification requirements for an SBA 504 loan

One of the most important details to know is that SBA 504 loans are only designed for specific purposes. According to the SBA, the program is for the purchase of "major fixed assets that promote business growth and job creation."

The most common use of 504 loans is to purchase real estate or new facilities. They can also be used to buy machinery and equipment with a useful life of at least 10 years and can also be used to improve or renovate existing real estate or facilities.

It's also important to know what 504 loans can not be used for. You can't get a 504 loan to buy inventory, to consolidate or refinance debt, or for working capital, for example. And while 504 loans are generally known for being business real estate loans, they aren't for investment properties -- they are to acquire or improve real estate where your business will operate.

Another major qualifying factor is business size. In order to obtain an SBA 504 loan, a business must be a for-profit company operating in the United States, have a tangible net worth of no more than $15 million, and must have average after-tax income of below $5 million for the previous two years. This is in addition to standard SBA requirements having to do with being a "small business" and being able to repay the loan.

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In addition to these requirements, you must have applied for other forms of financing before you applied for an SBA 504 loan. This is standard among all forms of SBA loans, as the general purpose is to provide access to financing for businesses who would otherwise be unable to get it.

Finally, you need to have good credit. Admittedly, this is a vague idea and there is some wiggle room. The SBA itself does not set a minimum credit score requirement, but the lenders who originate 504 loans typically want to see a FICO® Score in the mid-600s or better, as well as acceptable business credit scores (if applicable).

How much can you borrow with an SBA 504 loan?

The maximum loan amount for an SBA 504 loan is $5.5 million. However, the maximum loan amount for most purposes is $5 million. The minimum loan amount through the program is $25,000.

There are fees to originate a 504 loan, which may come from the SBA, CDC, and the lender you use. These are typically added to the loan's principal amount. Interest rates on 504 loans are fixed and depend on the 10-year U.S. Treasury yield.

Other types of SBA loans you might want to consider

As mentioned, the main SBA loan program is the 7(a) loan, which can be made in amounts of as much as $5 million. Unlike 504 loans, these have more flexible use cases, including for working capital, to buy inventory or other non-durable assets, or to acquire an existing business in its entirety. They are initiated through third-party lenders, not through CDCs, and can be much quicker.

There are some downsides, however -- for one thing, since they aren't specifically designed for asset purchases, they tend to have higher rates than 504 loans.

Where can you apply for an SBA 504 loan?

The first step in applying for an SBA 504 loan is to find a Certified Development Company, or CDC, that is authorized to issue 504 loans in your area. You'll then find a third-party lender, which the CDC can help with (remember, a 504 loan comes from both the CDC and another lender).

To apply, you're going to need extensive information about the asset(s) you're planning to buy or improve with the loan proceeds. This might include an appraisal, estimates for work to be done, and so on.

You'll also need to provide quite a bit of documentation. This can include your tax returns and financial statements (personal and business), information about your debt, written descriptions of your work experience, and more. To be clear, the documentation requirements for a 504 loan tend to be pretty extensive, so be prepared.

Is an SBA 504 loan right for you?

An SBA 504 loan can be an efficient and affordable way to fund the purchase of real estate or durable equipment to be used in your small business. However, there are some specific requirements that need to be met, and extensive application and documentation requirements, so keep this in mind as you navigate the process.

FAQs

  • There's no set-in-stone credit score requirement for an SBA 504 loan, although in practice, lenders want to see that the borrower has good credit -- both personal and business. This typically means a personal FICO® Score that is at least in the mid-600s, with no adverse items like charge-offs or collection accounts.

  • There are many different rules and requirements of both 504 and 7(a) loans. But generally speaking, a 7(a) loan has fewer restrictions and documentation requirements, plus it can be originated through any SBA-authorized lender. Both require extensive documentation, credit checks, and more, so neither loan type is "easy" to get.

  • No. SBA 504 loans are designed to purchase real estate or other durable assets, but only if they're to be used to operate your business. In other words, you can use an SBA 504 loan to buy an office building that your business will occupy. You cannot typically use one to buy an office building that you plan to rent out to third-party tenants.