What is an SBA 504 loan and how do I get one? – Forbes Advisor

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Businesses that need to make a major purchase to expand their business or create jobs may qualify for a 504 loan from the United States Small Business Administration (SBA). Applicants must meet certain eligibility requirements and comply with a lengthy application process, but can access low, capped interest rates and flexible loan amounts.

What is an SBA 504 loan?

An SBA 504 loan, or CDC/504 loan, is a financing program offered by the SBA to promote business growth and job creation through the purchase or improvement of real estate, equipment and facilities. other fixed assets.

Loans are originated and financed in part by SBA-certified Certified Development Companies (CDCs), with a portion of the funds coming from other approved lenders.

How SBA 504 Loans Work

SBA 504 loans are a type of SBA loan issued, funded, and serviced by CDCs and SBA-approved banks and credit unions. Potential borrowers choose a CDC based on their location and can then prequalify to see how much they are eligible to borrow.

Applications are processed and facilitated by the borrower’s CDC, with 40% of funding coming from this entity and backed by the SBA. The remaining 50% of the loan amount comes from a private sector bank or credit union, and borrowers are responsible for a 10% down payment. The loans are secured by the business assets funded and personally guaranteed by the owners of the business.

Once the funds are disbursed, business owners can use the proceeds from the 504 loan to fund capital assets that support business growth and job creation. This may include the purchase of machinery and other equipment, buildings, land or new facilities. Similarly, borrowers can use the funds to improve or upgrade existing facilities, grounds, streets, utilities, parking lots and landscaping.

Unlike many SBA programs, loan funds cannot be used for working capital or inventory and are not approved for use in debt refinancing or rental real estate investments.

SBA 504 Loan Details

SBA 504 Requirements

In general, a business must operate for profit in the United States and meet general SBA size guidelines to qualify for a 504 loan. However, there are several other program-specific eligibility requirements that must be met. . To qualify for an SBA 504 loan, applying businesses must have:

  • A tangible net worth of less than $15 million
  • An average net income of less than $5 million for the previous two years (after federal income tax)
  • Qualified management experience
  • A workable business plan
  • A demonstrated willingness to repay debts and obey the law
  • The ability to repay the loan

Notably, SBA 504 loans are not available to certain types of businesses, including those engaged in nonprofit, passive, or speculative activities.

How to Apply for an SBA 504 Loan

The application process for 504 loans differs somewhat from other SBA programs, in that borrowers must work directly with a CDC and a private lender, rather than working exclusively with an SBA-backed lender. Follow these steps to apply for an SBA 504 loan.

1. Find a certified development company

Unlike some SBA loans, the 504 loan program requires borrowers to identify a CDC to process their application and facilitate financing. CDCs are non-profit economic development organizations that aim to help economic development within the community. A list of CDCs is available on the SBA website.

2. Pre-qualify

After you find a CDC, prequalify to see how much your business qualifies for under the 504 program. Prequalifying costs nothing and doesn’t require a credit check, so there’s no risk. If you’re in the real estate market, prequalifying can also help you compete with other buyers and secure a property ahead of the formal application process.

The prequalification process is much less rigorous than submitting a formal application and requires submitting these documents:

  • Copies of personal and business income tax returns for the last three years
  • Interim financial documents illustrating the company’s financial situation
  • A personal financial statement

3. Make a purchase decision

Next, identify the equipment, real estate or other eligible assets you wish to purchase. It may also involve obtaining official quotes from contractors and otherwise determining how much your business needs to borrow. The calculation of what you need to spend will show how much you need to borrow and how much money you need to cover the 10% down payment requirement.

4. Submit a loan application

When you’re ready, submit a formal 504 loan application through your preferred CDC. The SBA provides potential borrowers with a library of 504 authorization files that allows applicants to download a ZIP file with all the documents needed for a 504 loan authorization file.

In general, expect to provide these documents as part of your 504 loan application:

  • Professional and personal financial statements
  • Business and personal income tax returns dating back three years
  • Accounts Payable and Accounts Receivable
  • A workable business plan
  • Contractor’s estimates (for construction loans)
  • Documentation of costs (for equipment loans)

5. Wait for approval

It usually takes up to a week for the SBA to make a loan decision. From there, the due diligence period can take up to three weeks. During this time, the CDC and the lender may request additional documents to support your claim. Provide this information as soon as possible to keep the approval and close process moving forward.

6. Complete loan and receive funds

Closing an SBA 504 loan typically takes one to two months. However, this period may be longer for larger purchases or more complex transactions. For this reason, SBA 504 loans are not a good option for business owners who need quick access to cash.

7. Comply with post-closing requirements

In addition to meeting SBA application requirements, 504 borrowers must comply with several post-closing restrictions and covenants. For example, borrowers must notify the SBA of proposed changes in business ownership and provide proof of payment of taxes, risk insurance, key person insurance, and financial responsibility. Business owners must also notify the SBA if they intend to obtain another loan with the collateral securing the 504 loan.

Advantages and Disadvantages of SBA 504 Loans

For businesses that want to expand by purchasing real estate, equipment, or other fixed assets, an SBA 504 loan can be a low-interest way to fund that expansion. However, the application process is rigorous and not all companies are eligible. These are the pros and cons of taking out an SBA 504 loan.

Benefits of SBA 504 Loans

  • Loans can finance up to 90% of a borrower’s project with just 10% down payment
  • Reimbursement times are long and flexible
  • Fees are capped at 2.65% of loan value
  • Interest rates are fixed for the duration of the loan

Disadvantages of SBA 504 Loans

  • Application and qualification requirements are complex and loans are competitive
  • Underwriting can be rigorous and require detailed documentation
  • Loan approval, closing and funding can take 60-75 days or more

Find the best small business loans of 2022

Alternatives to SBA 504 Loans

If you’re trying to get a business loan but don’t qualify for an SBA 504 loan, need to cover ineligible expenses, or want faster access to funds, there are other sources of financing that may be appropriate. Consider these alternatives to SBA 504 loans:

  • SBA 7(a) Loans. The SBA 7(a) loan program includes several popular financing tools that can be used for a variety of purposes, including working capital. Loan amounts range up to $5 million, depending on the program, and have repayment terms of up to 25 years for real estate or 10 years for equipment, working capital and of inventory. Rates vary by loan amount and repayment term, but cap at base rate plus 4.75%.
  • SBA Express Loans. SBA Express loans are a type of 7(a) loan that offers faster approval and funding speeds than other SBA programs. Applicants receive a loan decision within 36 hours for Express Loans and within 24 hours for Export Express Loans. That said, the loan amounts available are small (up to $500,000) and rates can be slightly higher than for other types of 7(a) loans.
  • Online lenders. In general, online lenders offer simplified applications and fast funding speeds compared to SBA loans. However, interest rates are generally higher than those available from SBA lenders, and qualification requirements may be more stringent. The best small business loans offer accessible qualification requirements, competitive rates, and flexible repayment terms.

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