To help small business entrepreneurs and owners achieve their goals, the U.S. Small Business Administration (SBA) was founded in 1953.

The SBA acts as the nation's leading resource and advocates the growth of small businesses by providing advice, money, and contracting expertise.

It is the only cabinet-level government agency devoted solely to assisting small businesses.

What is the SBA 504 Loan Program?

By providing fixed-rate and long-term financing, the SBA 504 Loan program makes it easier to acquire permanent assets supporting business growth and creating jobs.

These loans are provided by Certified Development Companies (CDCs).

These companies are SBA partners with an emphasis on nonprofit regulation and community development.

The SBA authorizes and oversees CDCs. At most, a 504 loan may be $5.5 million in total.

However, for specific energy projects, a borrower may be eligible for a 504 loan of up to $5.5 million per project and a maximum of $16.5 million for three projects.

Interest Rate on SBA 504 Loan

Currently, SBA CDC/504 loans have interest rates ranging from roughly 5.71%-5.72%.

The interest rates for SBA CDC/504 loans are variable and liable to change depending on some factors, such as market conditions and the creditworthiness of the individual borrower.

Uses of SBA 504 Loan

A 504 loan is a flexible form of financing that can be used for various items that promote business growth and job creation.

These assets include land, buildings, new facilities, long-term machinery and equipment.

It could also improve and update infrastructure like streets, utilities, parking lots and landscaping.

It also entails buying or building existing buildings or land.

It's crucial to remember that there are restrictions on how 504 loans can be used.
For instance, they cannot be used to purchase inventory or working capital, pay off, or invest in rental real estate projects.

504 loans are also not available for speculative investments.

How do SBA 504 Loans Work?

SBA 504 loans have a different structure than other SBA loan programs.

These loans comprise three distinct parties: the lender, the Certified Development Company (CDC), and the borrower.

The following are some essential ideas to remember:

A 50-40-10 formula is commonly used for SBA 504 loans. The SBA bank loan makes up 50% of the loan amount, the CDC contributes 40%, and the borrower makes a 10% down payment.

The required equity is 15% for special-purpose properties and new firms with less than two years of operation.

This results in a 50-35-15 structure.

According to the SBA, special purpose properties are limited-use properties that need a large expenditure to convert.

Amusement parks, cemeteries, nursing homes, inns, wineries, museums, petrol stations and hospitals are a few examples.

The borrower's equity requirements shift to 20%. This follows a 50-30-20 model if a business is both new and a special-purpose asset.

Are SBA 504 Loans Hard to Acquire?

No, the eligibility criteria for a 504 loan are not rigid and are relatively simple. Most for-profit businesses can qualify for SBA financing.

A company must be a for-profit organization operating in the United States, have a tangible net value below $15 million, and have an average net income of $5 million or less after taxes during the previous two years to be eligible for a 504 loan.

How to Apply for SBA 504 Loans?

SBA 504 loans are exclusively available through Certified Development Companies (CDCs). Finding a CDC helps ensure that businesses work with a qualified lender.

CDCs will help through the lender channels to develop project finance.

This is because they have a particular qualification for comprehending the rules of the 504 loan program.

Once a business has found a CDC, it can apply for an SBA 504 loan by submitting several documents, such as:

  • Business plan
  • Accounts payable and receivable
  • Contractor estimates (for construction loans)
  • Cost documentation (for equipment loans)
  • Business and personal financial records from the previous three years
  • Business and personal tax returns

Are SBA 504 Loans Personally Guaranteed?

Personal guarantees are required to be approved for an SBA 504 loan. Any company owner who holds 20% or more of the company's stock must personally guarantee the loan.

The majority shareholders will be required to guarantee the loan if no one owns more than 20% of the company.

If the combined ownership of partners exceeds 20% and either spouse owns more than 5% of the business, both spouses must guarantee the loan.

However, the non-owner spouses of the guarantors are not required to sign the collateral documents; only the guarantors are expected to.

Personal guarantees are a requirement for all SBA loans, including the SBA 504 loan.

SBA 504 Loan Eligibility

A 504 loan requires the following to be qualified:

  1. Operating as a for-profit business in the US or its territories

  2. Having less than $15 million in tangible net value

  3. Conforming to SBA size specifications

  4. Possessing expert management knowledge

  5. Developing a feasible business strategy

  6. Possessing the capacity to repay the loan

  7. Displaying good moral character

Ineligible businesses include those engaged in the following:

  • Non-profit activities
  • Passive activities
  • Speculative activities

Can SBA 504 Loans be Refinanced?

The SBA has recently expanded the eligibility requirements for 504 refinancing loans.

Only non-SBA loans were previously qualified for 504 refinancing loans.

Existing SBA 7(a) or SBA 504 loans can now qualify for refinancing under the new rules.

The SBA 504 loan is ideal for small businesses looking to buy, remodel, or acquire large equipment.

It also provides the option to restructure qualified business debt, such as mortgages tied to real estate.

SBA 504 refinance loans have several advantages above conventional 5–10 year durations.

These advantages include lengthy repayment horizons of 10–25 years, depending on the circumstances of the loan.

The loans have fixed, below-market interest rates that remain the same for the duration of the loan.

This makes it simpler for the owner to plan and decide the budget for the company. There are fewer owner equity requirements, and up to 85–90% financing is available.

Prepayment Penalties

There is a prepayment penalty if businesses repay their SBA 504 loan early.

Each year, the penalty amount, based on a percentage of the loan's value, is reduced until there is none in the eleventh and subsequent years.

According to the Small Business Administration (SBA), the prepayment penalty starts at 3% in the first year and decreases every consecutive year until it reaches 0%.

Is SBA 504 Loan Forgiveness Taxable Income?

The funding businesses receive from the CDC/504 program is not counted as part of their taxable income, just like other SBA loans.

If businesses meet all IRS requirements, they may be eligible to deduct up to 100% of interest payments.

504 ALP Express Loan Program

The SBA created the 504 ALP Express Loan Program under section 328 of Public Law 116-260, generally known as the Economic Aid Act.

With the help of this program, Certified Development Companies (CDC) can speed up the permission, approval and closing of loans worth up to $500,000.

The ALP Express seeks to modernize the program while supporting smaller commercial real estate loans and assisting the industry in serving more small enterprises.

The Express Programme can be permanent but will end on September 30, 2023.