The Small Business Administration's (SBA) 504 Loan program is for small businesses needing to acquire major fixed assets, to expand, to modernize, or to construct a new facility. This program provides long-term, fixed-rate (up to 20 years) financing to encourage community growth and business expansion. SBA 504 loans can only be used for fixed assets such as:
- Real estate, both existing buildings and new construction
- Improvements and upgrades. This can include street grading, parking lots, landscape, etc.
- Remodel or conversion of existing facilities.
- Purchase of machinery and equipment needed long-term.
The three parts to a 504 Loan
- Part one: A loan secured with a first mortgage from a private-sector lender covering up to 50% of the project cost.
- Part two: A second mortgage secured with a junior lien from an SBA certified development company covering up to 40% of the cost. (This is 100% backed by the SBA)
- Part three: A contribution from the small business owner of at least 10% equity for the cost of the project.
With SBA 504 loans borrowers can finance up to 90% of appraised property value. They can also include the eligible refinancing costs. To be eligible for a 504 loan, a business must operate for profit, and fit the size guidelines set by the SBA for the 504 program. This means tangible net worth can’t exceed $15 million, net income can’t exceed $5 million after taxes. In addition, 504 loans can’t be made to businesses that speculate or invest in rental real estate.
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