Overview
If you’ve ever thought about expanding your business or investing in commercial property, you’ve probably wondered how to determine the best financing options.
If you’re new to investing or unfamiliar with your options, the landscape can feel daunting. The last thing you want to do is choose a financing option that shackles you with poor rates or a hectic repayment schedule.
The SBA 504 loan is perfect for business owners who want to expand or purchase equipment.
With great financing rates, generous amounts, and flexible repayment terms, the SBA 504 loan is an amazing choice for many business owners.
In this article, we’ll explain how these loans work, how to obtain them, pay them back, and much more.
Let’s dive in.
SBA 504 Loans: How they work
SBA 504 loans operate differently from other loans and financing options.
In most cases, loans involve the borrower and the lender.
By way of contrast, SBA 504 loans have three parties: the borrower, the lender, and the Certified Development Company (CDC).
In this arrangement, the lender (usually a bank or credit union) will provide up to 50% of the loan, the CDC will cover up to 40%, and you, as the borrower, will cover 10%.
This means SBA 504 loans will cover up to 90% of the costs of your needs!
These percentages can vary from case to case, so be sure you discuss them with your loan provider.
It’s important to remember that because you’re receiving money from two other parties, they’ll each have different interest rates and liens.
How to get an SBA 504 Loan
There are a few eligibility requirements that you should consider when applying for an SBA 504 loan.
Your CDC and your lender might give you other, smaller requirements, but here are the main ones:
For-Profit Business
Your business must be a for-profit business based in the United States.
SBA 504 loans cannot be given to nonprofits, political businesses, gambling businesses, life insurance companies, or passive income businesses.
Most businesses will be eligible!
You can always ask a CDC for more information if you’re unsure.
Use of space for the purchased property
If the loan is used to purchase property for the business, you must ensure and prove that at least 51% of the property space will be used for YOUR business.
This percentage goes up to 60% if you plan to renovate or construct add-ons to an existing property.
Net worth
The SBA is the “Small Business Administration,” and the SBA 504 loan is to help “small” businesses.
But what exactly is a small business?
In this context, a small business means that the business cannot have a net worth exceeding $15 million and/or after-tax profit of more than $5 million over a two-year period.
These amounts may change depending on your type of business, but these are good numbers to start with.
Ask the SBA if you’re still unsure about the scale of your business!
Personal Guarantees
Your personal financial history and any relevant personal financial information will be submitted to the SBA, the CDC, and your lender to ensure repayment.
Sometimes you’ll also need to submit a personal history statement.
This summary of financial and personal information will help the loan partners decide if you are someone they can trust with paying back your loan.
How to use an SBA 504 Loan
While these loans have a broad reach and are available to many, there are still rules and regulations that dictate how you can spend money you receive through an SBA 504 loan.
- SBA 504 loans can be used for:
- Purchasing property for your business
- Construction for your business
- Equipment for your business
- Modernizing/renovating business real estate and facilities
- SBA 504 loans cannot be used for:
- Residential property or property that won’t primarily be used to conduct business operations
- Working capital or short term cash
- Consolidating debt
How to apply for an SBA 504 loan
Applying for an SBA 504 loan is a straightforward process.
Here are the steps you will take to get an SBA 504 loan for your business.
- Make sure you are eligible
We’ve covered eligibility in this article. Use our guidelines to make sure you and your business qualify for an SBA 504 loan!
There are a few other conditions to remember, which will change from lender to lender.
If you have a history of defaulting on loans, have a low credit score, or even own too many assets, you’ll find it challenging to secure an SBA 504 loan.
- Find your lender and/or CDC
Lenders such as banks will offer SBA 504 loans. Once you arrange a meeting with a lender, they will help you connect to a CDC that has rates and payment plans that work for you!
You can also start by finding a local CDC. They’ll explain their rates and regulations and connect you to a lender.
Once you’re in contact with both parties, you will need to present personal and business tax return statements for the past 2-3 years and any relevant financial documents.
You’ll also need to present a personal guarantee, usually in the form of a written personal guarantee statement, ensuring your reliability to pay back your loan.
Visit Loanbase for an easy-to-use platform that connects you directly with lenders tailored to your unique financial needs.
- Application documents
There are a variety of documents and forms you must submit to get your loan.
You must outline what you plan to use the money for, a timeframe for how it will be used, and you’ll need to fill out application documents found on the CDC’s or SBA’s website.
Because this is a loan option for businesses, make sure you have necessary business licenses, partner acknowledgments, outlined business plans, and any other business-related documents.
During this stage, you will also be able to discuss financing and repayment terms.
You’ll need to do this for both your lender and the CDC.
Following this, you will receive a letter of intent, which outlines your terms and what your expected interest rate will look like.
You may have to make a payment at this time, although this depends on the parties involved.
- Underwriting
This stage is more or less a waiting game.
During the underwriting period, the CDC and lender will do their due diligence and inquire about you and your company, in order to assess your risk.
Wait for them to contact you and respond in a timely and accurate fashion.
- Finalizing the loan
At this point, if the underwriting process did not reveal significant risk to the other parties, you’re just about done with the application process and are on your way to expanding your business!
The most you’ll have to do here is sign any closing documents.
While the overall application process can take some time, as long as you qualify for the loan and are not a risk to either the lender or CDC, you’ll secure your SBA 504 loan!
How to repay your SBA 504 loan
Repaying your SBA 504 loan depends on a few factors, namely the repayment terms and interest rates.
Repayment terms usually exist in 10, 15, and 20-year increments.
While you can simply pay on scheduled payment dates, you are also able to pay your loan off early, with a few conditions.
After half of your repayment term has passed, you can pay off the entirety of your loan at no additional cost. However, you’ll face prepayment penalties if you decide to pay off before the halfway point.
These penalties will decrease every year approaching that halfway point. This is referred to as the debenture rate. Basically, the earlier you pay off your loan, the more you’ll end up paying additional fees.
Interest rates will vary depending on your own financial factors as well as lender and CDC conditions, but you can expect to pay a fixed rate for the duration of the loan.
Sample SBA 504 loan terms
| Maximum Amount | $2,500,000
($1,250,000 / $1,000,000 Split) |
| Timeline | 20-year |
| Interest Rates | Market Rate + 1.35% |
| Fees
(Will be deducted from loan amount) |
Processing – 1% Guaranty – 0.5%Agent – 0.3%Total – 1.8% ($45,000) |
| Use of Proceeds | Renovation and expansion of office property |
| Required Equity | $250,000 as cover |
SBA 504 loans vs SBA 7(a) loans
| SBA 504 | SBA 7(a) | |
| Loan Size | $5M max | $5M max |
| Interest Rate | Fixed rates for the duration of the loan | Fixed and variable rates are both available – can be negotiated |
| Terms | 10, 20, and 25 years | 7 years for working capital
10 years for business acquisitions and equipment 25 years for real estate |
| Fees | Based on debenture and included in the value of the loan | Based on the guaranteed dollar amount and included in the value of the loan |
FAQ
Is it hard to get an SBA 504 loan?
Not at all!
While it can be a lengthy process, if you follow the eligibility guidelines and ensure you provide the necessary documents, getting an SBA 504 loan is simple and easy!
There’s a reason why they’re often referred to as the gold standard for loans!
What are the differences between SBA 504 loans and SBA 7(a) loans?
One of the biggest differences between an SBA 504 and an SBA 7(a) loan is its use case.
While SBA 504 loans can be used for acquiring property and equipment for businesses, they cannot be used for working capital.
SBA 7(a) loans can!
SBA 504 loans also have fixed interest rates, while SBA 7(a) loans come with either variable or fixed interest rates.
They also operate differently in terms of how money gets to you.
Will SBA 504 loans be forgiven?
The SBA has offered debt relief in the past due to COVID-19 impacting businesses, and The Economic Aid Act of 2021 has added another layer of debt forgiveness to SBA loans.
The Economic Aid Act provided three months of debt forgiveness (with a cap of $9000/month per loan) for loans approved from February to September of 2021. While this act might not currently be active, it might return in some capacity as the pandemic continues.
As for current debt forgiveness, businesses still recovering from the impact of COVID-19 can receive debt relief assistance right from the SBA. They address both loans on and off deferment.
Final Thoughts
With great rates, flexible terms, and widespread availability for a majority of businesses, it’s no wonder why so many businesses seek financial aid through SBA 504 loans.
Wondering where you can go to get started?
Check out Loanbase today! We created our platform to simplify and modernize the process of matching commercial lenders and borrowers.
Wherever you are in your real estate journey, we’re here to help.
