SBA 504 Loan Program FAQs
Your 504 Questions Expertly Answered by Jeff Bardos, CEO Speritas Capital Partners
Purchasing commercial real estate to operate a business is a common use of funds for an SBA 504 loan.
OVERVIEW: What is the SBA 504 loan program?
The SBA 504 loan program is a U.S. government-guaranteed financing program designed to stimulate investment in long-term, fixed assets. It is one of several loan programs managed by the SBA.
The 504 program makes long-term, low down payment loans available to eligible businesses at attractive interest rates. The program’s goal is to increase economic activity, create jobs, and strengthen local tax bases.
SBA 504 deals are complicated because they involve 2 lenders versus a single lender in an SBA 7a transaction. The two lenders are:
1) a for profit lender
2) a Certified Development Corporation (CDC), which is an SBA-approved nonprofit entity.
The benefits of 504 loans are low rates, more fixed rate options and long maturities.
Having the right advisor by your side during the lender selection, loan structuring, underwriting and closing processes is critical to a successful and timely 504 loan closing.
How are 504 loans structured?
SBA 504 loans are structured differently than 7a loans. A typical 504 loan has a 50/40/10 structure:
a senior lender provides 50% of the total project cost;
a Certified Development Company (CDC) provides 40% of the project cost through a subordinated loan; this is the SBA-guaranteed portion; and
the borrower’s equity injection of 10% of the project cost (in general)
Borrowers have several options on how to provide the equity injection. What qualifies as equity? See our Article on the Six Sources of Equity that Meet the SBA’s Equity Injection Requirements
What is a 504 loan Certified Development Company (CDC)?
Per the SBA’s SOP, Certified Development Companies (CDCs) are non-profit corporations certified and regulated by the Small Business Administration to package, process, close, and service 504 loans.
These 504 loans are issued through a partnership with the CDC and private sector, third party lenders.
Nationwide there are over 250 CDCs. Each one has a regional or state focus, and they are restricted to operating in 1 to 2 states. Senior (for profit) lenders can work with any CDC but they often have strong relationships with 1-2 CDCs per region.
Read more about the SBA certification process for Certified Development Corporations.
How is the SBA 504 loan program different from the SBA 7a loan program?
The eligibility requirements for SBA 504 loans are very similar to the requirements for SBA 7a loans, the SBA’s flagship program. However, the eligible uses of 504 loans are more restrictive than 7a loans.
Uses of 504 loan funds fall into two main areas:
Buying or improving commercial real estate (existing or new facilities); and
Purchasing machinery and equipment with long useful lives.
The maximum 504 loan amount can be much higher than 7a loans. There is no SBA-imposed cap on the total loan size, only on the SBA-guaranteed portion.
In practice, total loan sizes can be up to $20 million - if the senior lender is comfortable lending a higher proportion of the project cost than is usual in the 504 market.
The maximum 504 loan amount - that is, the SBA guaranteed portion considered ‘504’ - is generally $5 million, the same as the SBA 7a limit.
For certain energy-efficient projects, the borrower can receive a 504 loan for up to $5.5 million per project.
Note that the entire loan is referred to as a 504 loan, but only the SBA guaranteed portion is ‘504’. The balance is provided by a senior lender and the entire loan package is commonly referred to as ‘an SBA 504 loan’.
Specifically, what can an SBA 504 loan be used for (eligible uses)?
The SBA provides a list of assets that can be financed with 504 loans, including:
Owner-occupied commercial real estate and related real estate improvements. The borrowing business must occupy more than 50% of the available space.
Equipment with a useful life over 10 years, such as:
Manufacturing equipment
Precision equipment
Loaders and forklifts
Construction equipment
Large off-road trucks
Commercial kitchen and commercial laundry equipment
Equipment involved in renewable energy or fuels
What are the ineligible uses of a 504 loan?
504 loans are designed to support long-term assets and long-term business activity. A 504 loan cannot be used:
to finance working capital or inventory;
to consolidate, repay or refinance debt (with some exceptions);
to speculate or invest in real estate other than as an active business occupying the majority of the space
Questions? Schedule a call with the author, Jeff Bardos, send an email, or call/text 203-247-4358.
What businesses are eligible to borrow under the SBA 504 program?
The borrowing business must be a for-profit business. Examples include real estate trusts, partnerships, and corporations.
Special purpose real estate vehicles can be one part of the picture. Such entities may be the borrower and lease the property to the operating company.
Your debt advisor can provide input into the legal structure which best fits the operating company’s goals. Legal counsel will need to review and approve any proposed structure.
What businesses are ineligible to borrow under the SBA 504 program?
Ineligible borrowers are the same under 504 rules as for 7a loans: non-profits, lending and passive investment firms, insurance companies, religious organizations, gambling facilities, or businesses with a prurient sexual nature.
What are the maturities on SBA 504 loans?
The maturity of the senior loan offered by lenders varies widely, from 10 to 30+ years. Longer maturities result in lower monthly payments so finding the longest maturity for a specific deal is important. 25-year amortization can result in 40% lower monthly payments vs. a 10-year loan.
Maturities on the CDC/SBA loan are 10-25 years for real estate and 10 years for machinery and equipment.
Working with an expert advisor who has a good sense of the available senior loan and CDC options is very important in lowering the overall cost of the 504 loan.
What are the interest rates on an SBA 504 loan?
Banks and nonbank, private lenders provide the senior loans as part of a 504 transaction. The interest rate on the senior loan is determined by the lender.
Loan rates are based on market rates and the lender’s cost of funds. In general bank lenders will have lower interest rates while non-bank lenders will have higher rates but more credit flexibility.
The rate on the senior loan is usually fixed for at least 5 years and reset periodically over the life of the loan.
The rate on the subordinated 504 loan is fixed for the life of the loan and is based on the U.S. Treasury rates in effect at the time of the loan closing.
Who Can Qualify for an SBA 504 Loan?
The requirements for who and what type of business can qualify for an SBA 504 loan is similar to the requirements for an SBA 7a loan.
And what you need to qualify for an SBA 504 loan is also similar to what you’d need to qualify for an SBA 7a loan: ability to make the equity injection; strong cash flow; relevant experience; strong credit; and personal financial strength.
To learn more about these requirements visit our SBA 7A loan page.
Speritas Capital Helps CT Retailer Acquire and Renovate a Commercial Building
A high end, luxury retailer was at the end of the lease term for her successful business. She saw this as an opportunity to acquire a building with a better location, and build it out to match her luxury goods.
Given the needs of the company, we recommended a cost-effective SBA 504 loan.
A Successful SBA 504 Loan Example:
More Recently Funded SBA Deals by Speritas Capital
Check out more of our recently funded deals
How Does Speritas Capital Help?
Because Speritas Capital is a debt advisory firm, we have access to a wide variety of funding solutions & lending structures. We’re not beholden to any one lender or structure so we can use our creativity and experience to design a structure that truly fits the needs of our clients.
We work with clients to develop a financial presentation which properly represents your business and help you find the right lending partner.
Questions for us?
You need a strategic, cost effective solution to your financing needs and a financing advisor you can trust. And one who never takes upfront fees.
Let us put our decades of banking and structuring experience to work for you – email Speritas Capital Partners with your questions about SBA 504 loans today.
Call or text Jeff Bardos, CEO
directly at 203-247-4358,
or Schedule a call with Jeff
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