Get the details on the SBA 504 loan program and see if it's the right fit for your business.

An SBA 504 loan from the U.S. Small Business Administration (SBA) may be helpful for companies that need to make a business acquisition to grow their operations or add productive jobs. A sometimes lengthy application process and specific eligibility standards must be met before applicants can access these low interest rate loans with flexible terms.

An SBA 504 Loan: What Is It?

An SBA 504 loan, also known as a CDC 504 loan, is a financing option the SBA provides to support business expansion and the creation of jobs through the acquisition or upgrading of real estate, machinery, and other fixed assets.

The loans are made and partially backed by SBA-certified Certified Development Companies (CDCs), with funding from additional authorized lenders.

The U.S. Small Business Administration (SBA) offers an SBA 504 loan program that may be helpful for companies that need to make a sizable acquisition to grow their operations. This program provides long-term, fixed-rate financing for the purchase of fixed assets, such as land, buildings, and equipment. The SBA also offers a loan guarantee program that can help businesses secure funding from commercial lenders.

Procedure for Getting an SBA 504 Loan

Banks and credit unions that have received SBA approval as well as CDCs can issue, fund, and administer SBA 504 loans. Prospective borrowers select a CDC based on where they live, and they can then prequalify to find out how much money they qualify for.

Applications are handled and made easier by the borrower's CDC, which also provides 40% of the cash with SBA backing (i.e., a guarantee). Borrowers are required to put down 10% of the loan amount, with the remaining 50% coming from a private sector bank or credit union. The financed business assets are used as collateral for loans, and the firm owners also personally guarantee them.

Once funds have been distributed, business owners can utilize the money from the SBA 504 loan to pay for fixed assets that support business expansion and the creation of new jobs. This can involve investing in new facilities, land, buildings, and other machinery and equipment. The same goes for borrowers who wish to upgrade or update already-existing properties, buildings, streets, utilities, parking lots, and landscaping.

Loan monies are not permitted to be utilized for working capital, inventory, debt refinancing, or rental real estate investments, in contrast to many SBA programs (contrast with SBA 7a loans).

SBA 504 Loan Information

Some important details about SBA 504 loans are as follows:

• $5 million in loans, with $5.5 million going to small producers
• term length: 10 Years for Real Estate and 20 Years for Machinery and Equipment
• rates of interest
  • 3 percent of the debt is pegged to an increment above the rates on the 5- and 10-year US Treasury notes.
• fees early guarantee fee (0.50 percent of loan amount), annual service fee (0.2475 percent of outstanding debt), and lender-specific fees are all included in the financed amount.

SBA 504 Conditions

A company must typically be profitable and comply with SBA size requirements to be eligible for an SBA 504 loan. There are, however, a number of additional program-specific eligibility conditions that must be fulfilled. Applicants for SBA 504 loans for businesses must possess the following:

• a real net worth of less $15 million
• less than $5 million in net income per year on average over the previous two years (after federal income taxes)
• a strong management background
• a workable business strategy
• a shown willingness to obey the law and repay debts
• the potential to pay back the debt
• In particular, businesses involved in nonprofit, passive, or speculative operations are not eligible for SBA 504 loans

How to Make an SBA 504 Loan Application

In contrast to other SBA programs, the SBA 504 loan application procedure requires applicants to deal directly with a CDC and a commercial lender rather than just an SBA-backed lender. To submit an SBA 504 loan application, follow these steps:

1. Track down a certified development company (CDC)

In contrast to some SBA loans, the SBA 504 loan program necessitates that applicants choose a CDC to handle their application and assist with financing in other ways. CDCs are nonprofit organizations dedicated to promoting economic growth in local communities. You may see a list of CDCs on the SBA website.

2. Be qualified

Prequalify to see how much funding your company is eligible for under the SBA 504 program after locating a CDC. There is no danger associated with prequalifying because it doesn't cost anything and doesn't call for a rigorous credit investigation. Prequalification can help you compete against other purchasers and secure a building before the formal application procedure if you're looking to buy real estate.

Prequalification requires the submission of the following documents and is a significantly less stringent process than filing a formal application:

• copies of the last three years' worth of personal and business tax returns
• interim financial reports that show the financial health of the company
• a personal financial statement from you

3. Decide whether to buy the item

Next, decide which machinery, property, or other qualified assets you want to buy. This could also entail requesting official quotations from contractors and figuring out how much money your company needs to borrow in general. By figuring out what you need to spend, you can determine how much money you'll need to borrow and how much cash you'll need to put down the required 10 percent.

4. Submit an Application for a Loan

When you're ready, contact your selected CDC and file a formal SBA 504 loan application. Prospective borrowers can obtain a ZIP file containing all the required paperwork for an SBA 504 loan authorization package from the SBA's 504 Authorization File Library.

Generally, you can anticipate submitting the following paperwork with your SBA 504 loan application:

• individual and business financial statements
• tax returns for individuals and businesses going back three years
• A/P and A/R statements
• a workable business strategy
• contractors' projections (for construction loans)
• cost documentation (for equipment loans)

5. Wait for Approval

The SBA normally takes a week or more to decide whether to provide approval. The following round of due diligence could last up to three weeks. The CDC and lender can ask for more supporting documents for your application during this time. To keep the approval and closing processes on schedule, please provide any requested information as soon as you can.

6. Complete the loan application and receive the money

An SBA 504 loan usually closes in one to two months. However, this period might be extended for more involved or substantial transactions. Because of this, SBA 504 loans are not a good choice for entrepreneurs who require quick access to capital.

7. Follow the requirements after the closing

The SBA's application requirements and a number of restrictions and covenants must be met by SBA 504 borrowers. Borrowers are required to inform the SBA of any intended changes to the ownership of their business and to present proof of their financial responsibility, tax payment, and purchase of hazard and key person insurance. Business owners must also inform the SBA if they plan to use the 504 loan collateral to secure another loan.

Benefits and Drawbacks of SBA 504 Loans

An SBA 504 loan can be a low-interest means of financing for firms that seek to expand by buying real estate, machinery, or other fixed assets. The application procedure is demanding, though, and not all businesses qualify. The benefits and drawbacks of obtaining an SBA 504 loan are as follows:

Advantages of SBA 504 Loans

• With just a 10% down payment, a borrower's project can be funded to the tune of 90%.
• Long and flexible repayment terms are available.
• The maximum amount of fees is 2.65% of the loan's value.
• The loan term's interest rates are set for the life of the loan.

Drawbacks of SBA 504 Loans

• Loans terms are not always competitive, and application and qualification standards are complicated.
• Underwriting can be difficult and demand a lot of documentation.
• It may take 60 to 75 days or more for the loan to be approved, closed, and funded.

As always, it’s best to consult with an experienced commercial loan broker for all of your SBA loan program needs. They can answer any questions you may have and guide you through the process.