SBA 504 Loans

January 14, 2020

By Linsey Knerl

While Small Business Administration (SBA) loans are common solutions for borrowers looking for working capital, what happens when you need a huge influx of cash to cover the costs of real estate? The SBA 504 loan program is where it’s at. It offers SBA Loan interest rates (a low fixed rate) and relatively low payments to business owners with a solid credit score. Here’s more about this choice of small business loans.

How does the SBA 504 loan program work?

For qualified borrowers who are interested in business expansion, the SBA 504 loan is a solid option. Sometimes referred to as a CDC loan, it is available for investing in the construction of a new property, purchase of existing real estate, or equipment for the new property. The loan is designed for the enormous debt that accompanies such purchases, giving borrowers up to $20 million in credit. 

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SBA 504 loan requirements

Any property purchased through this program must be at least 51% owner-occupied. It’s not designed for buying a property that will be rented out to others for a profit, something common for a development company. 

The loans themselves work like property loans, and a down payment is generally required. Unlike longer mortgages, however, which can be repaid in 30 years, the SBA loan terms for the 504 program are between 10 and 20 years. You can imagine that makes for some pretty large payments! 

Because of the size of the loans, the loan is 50% funded by the SBA-backed private lender and 40% funded by a Community Development Corporation (also called a “CDC.”) The remaining 10% is up to you to fund, as part of a cash down payment that shows you are serious about borrowing and acts as personal guaranties of repayment. 

Can a borrower use the 504 proceeds as a disaster loan? Any qualified real estate purchases may be a good fit for the 504 program, but don’t discount loans given to those in qualified disaster areas. These loans are often easier to qualify for and have more generous loan terms. 

SBA 504 loan pros and cons

Of all of the SBA loans, the 504 real estate loan is the largest. Their most notable perk is that, if you qualify, you can access some of the highest loan limit lines available to small businesses. The program can lower costs on the way to access long-term financing, too, since it’s partially funded by the bank and partially funded by the CDC. 

A major drawback of the program, however, is that a large loan requires more documentation and a better credit rating than smaller loans. There’s also a long time between your initial application and final loan closing. It’s not quick money, and it’s not available for most non-profit corporations. 

When to use SBA 504 loans, and when not to use them

If you need a large loan for purchasing property for your business, whether to start new operations or expand your offerings, a 504 loan can fit the bill. It gives you access to large amounts of cash and is designed for property, machinery, and other expensive, long-term assets. 

If you plan on using loan proceeds for working capital, however, the SBA 7(a) loan is a better fit. You’ll also be discouraged by the 504 process if you need cash quickly. This is not the option for those looking for fast loan funds to help with operating expenses. Instead, try the express version of the SBA 7(a) loan program, which is made to streamline the application for a much simpler application process and a quicker outcome and possible road to working capital (just one to two months from start to finish.) 

Likewise, if you only need a very small amount of cash financing – something along the lines of tens of thousands of dollars – or you are a start-up business, an SBA microloan is more appropriate. Note that not all banks that offer the 504 loans are microloan or express loan providers. Inquire with your bank to see what in which SBA programs they participate. 

Finally, if you aren’t going to be using the property you buy as a place for your business, but choose to rent it out to others, you won’t qualify for the SBA 504 loan. There are certain industries that SBA 504 lending partners won’t give money, too, as well – and these can vary by lender. SBA 504 loan proceeds can’t be used for debt refinancing, either. 

SBA 504 loan companies

There are many certified banks and financial institutions that provide 504 loans to qualified businesses looking to acquire expensive assets, more than what is listed here. These three lenders have a good reputation for making the SBA loan application process simple, however, and are accustomed to the cumbersome paperwork and documentation requirements that 504 financing requires. Since they do SBA loans often, they can guide you through the process and help you avoid common pitfalls when putting your application package together. 


SBA Loan by SmartBiz

SmartBiz combines the benefits of a traditional SBA loan without the long and tedious application Learn More

While not participating in the 504 program, this company facilitates loans of up to $5 million to qualified businesses through the SBA 7(a) program to be used for commercial real estate. The loan rates are variable, ranging from the Prime rate, plus 1.50% to 3.75%. Small business owners get between 10 and 25 years to repay the loan. 

Additional eligibility requirements include a two-year minimum business history, personal credit scores of 660 or higher, sufficient business and personal cash flow that can be demonstrated by three years of tax records and financial reports. As part of the SBA program, the applicant must also be free from delinquencies or defaults of any previous government or SBA loans. The prequalification process can be done online, with only a soft pull on your credit report, which won’t affect your score! 

Celtic Bank

SBA Express Loan by Celtic Bank

Celtic Bank is a nationwide small business lender specializing in SBA loans. The Celtic Bank Learn More

Celtic Bank is a trusted partner in the SBA 504 loan program, offering this popular real-estate loan as one of many financing options available. They offer loans of up to $10,000,000 at a term of up to 25 years. Like all banks, they require collateral for loans of this size, accepting commercial real estate, equipment, and machinery as security for repayment terms. 

Their loans come in both fixed rate and variable options, depending on your credit history. They require applicants to be owner-operated and for-profit companies, as dictated by the SBA; their financing isn’t available to convenience stores, gas stations, or hospitality businesses, as well as any non-profit organizations. 

Wells Fargo

This private lender handles many SBA 504 loan applicants throughout the year, and they have favorable terms for a variety of businesses. Loans are given to those looking for longer-term financing who have a tangible net worth of under $15 million. They prefer businesses with an average net income of below $5 million, as well. Borrow up to $6.5 million for the Wells Fargo portion of the loan (the other portion comes from the CDC.) Get up to 20 years to repay real estate and 10 years for machinery or equipment. Pay lower loan fees than some other financing options on your fixed or variable-rate loan.

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About Author

Linsey Knerl

Linsey Knerl

Linsey Knerl is a Midwest-based author, public speaker and member of the ASJA. She has a passion for helping consumers and small business owners do more with their resources through awareness of the latest financial and tech services.