SBA 504 Loans: What Businesses Qualify and How Do They Work?


Small businesses have a range of loan options to choose from. They could opt for small business administration loans, merchant loans, or startup grants, to name a few. One of the most popular types of loans on offer is a 504 loan. These are designed to provide funding for the purpose of purchasing fixed assets. In this context, fixed assets could imply investments in real estate, machinery, or other types of equipment with a long life.

What is an SBA 504 Loan?

SBA 504 loans administered by the US Small Business Administration (SBA). 504 loans are among the best SBA online loans and are also known as Certified Development Company (CDC) loans. The structure of these loans is very specific as the SBA contributes 40% of the amount, a participating lender provides 50%, and the borrower contributes the remaining 10%. 

SBA 504 LoanThe Benefits

The above benefits indicate that such loans could prove to be extremely useful for any small business. The SBA loan lenders that are involved in these projects tend to be well-established banks, making sure that you receive your funds without any hassle.

  • A small business could receive up to 90% of financing for their expansion projects
  • SBA loans rates that are charged in this case are comparatively lower and are also fixed
  • The amortization for these loans tends to be much longer compared to traditional loans
  • There are no balloon payments
  • The loans are administered by the SBA, and therefore the degree of risk involved is fairly low

How Do SBA 504 Loans Work?

SBA 504 loans are designed to help small businesses with specific capital needs and are typically provided at comparatively low interest rates. Once the borrower applies for the loan, the SBA checks their eligibility and decides whether to approve the funds. For example, there could be a startup company that needs to purchase fixed assets in order to develop a new product.

Suppose the expenses involved are around $500,000. If eligible for the loan, then the SBA would lend $200,000, a bank would step in and lend $250,000, and the borrower would have to arrange the remaining $50,000. The funds provided by the bank would come under the 1st lien, the SBA funds are the 2nd lien, and the remaining is called the borrower’s contribution.

These funds can be used for the following purposes:

  • Purchase of land and related improvements
  • Purchase of existing buildings
  • Buying long-term machinery
  • Construction of new buildings or facilities
  • Refinancing of debt

It should be noted that these funds cannot be used for working capital expenses or other short-term needs. Some classic uses for these funds include the purchase of agricultural equipment or the construction of a new factory.

Who Can Qualify for an SBA 504 Loan?

The eligibility criteria for these loans are as follows:

  • Must be operating a for-profit business
  • The tangible net worth of the business should not exceed $15 million
  • The average net income of the company over the past two years should be under $5 million
  • The business should not be engaged in any kind of speculative or passive activities

Businesses that qualify according to the above criteria are then expected to contact their local CDC.

SBA 504 Loan Requirements

The maximum amount that can be borrowed under 504 loans is $5 million. In addition to this, a business needs to create or retain one job for every $65,000 that has been provided. This figure is $100,000 in the case of small manufacturers. Finally, it is also worth noting that the CDC specifies community development and public policy goals that need to be met in case a business cannot create or retain jobs.

SBA 504 vs 7(a) Loans – What Is The Difference?

Business owners may be confused between 504 loans and 7(a) loans. Here are a few key differences:

  • Interest rates for 504 loans are fixed, but they are variable for 7(a) loans
  • While 504 loans are meant for fixed assets, 7(a) loans can be used to buy inventory
  • The loan structure for 504 loans is fixed, while it is flexible for 7(a) loans
  • Project assets are used as collateral in 504 loans while 7(a) loans need personal pledges


SBA 504 loans could be a good choice and prove to be very useful for your small business. Ultimately, a small business can benefit from financing of up to 90%. The loans are secured due to the role played by the SBA, and the interest rates are comparably low, delivering an attractive financing deal for prospective borrowers.


About Author


Founded in 1994 by the late Pamela Hulse Andrews, Cascade Business News (CBN) became Central Oregon’s premier business publication. •

Leave A Reply