Editorial · February 23, 2025
SBA 504 Loan: How Owners Finance Property and Equipment
An SBA 504 loan is a long-term, fixed-rate loan that helps a small business buy property or big equipment. It works as a team effort. A bank, a nonprofit lender and the owner each put in a share. This guide explains who does what, what the money can buy and what to ask before you apply.
How the three-part split works
A 504 project is paid for in three parts. The rules in the federal code set the usual pattern. The owner puts in at least 10 percent of the project cost. A Certified Development Company, called a CDC, supplies up to 40 percent. A bank or other private lender covers the rest, which is often about half.
The bank's loan sits in first position. That means the bank has the first claim on the property if the loan goes bad. The CDC's loan sits in second position behind it. The CDC part is funded by a debenture, which is a bond that SBA guarantees. Investors buy those bonds in pools.
Most projects also need a short-term loan while the building is built or bought. Often the same bank that makes the main loan provides it.
Sources: 13 CFR 120.801, "How a 504 Project is financed," eCFR, point-in-time copy of January 31, 2025.
What a 504 loan can pay for
SBA says the loan is for major fixed assets that help a business grow and add jobs. That includes buying an existing building or land. It also covers new construction. Long-lasting machinery and equipment qualify when the item has at least 10 years of useful life left.
The loan can also pay to improve or modernize land, streets, utilities, parking lots, landscaping and existing buildings. In some cases it can refinance certain debt, but only if the debt meets SBA's definition of qualified debt.
It cannot pay for working capital or inventory. It also cannot fund speculation or investment in rental real estate. If you need cash for payroll or stock, a 504 loan is the wrong tool.
Sources: U.S. Small Business Administration, "504 loans" page, as archived by the Internet Archive on February 22, 2025 (page last updated February 20, 2025).
Who can qualify
Your business must be a for-profit company in the United States or its possessions. SBA lists two size tests. Tangible net worth must be under $20 million. Average net income after federal taxes for the two years before you apply must be under $6.5 million.
SBA also looks at the basics any lender checks. Your company must fit SBA size guidelines. You need qualified management, a workable business plan, good character and the ability to repay. Nonprofit, passive and speculative businesses are not eligible.
The project must also serve the public. Each loan must create or retain jobs. SBA sets the target as one job for each set amount of loan funding, and it publishes that amount in the Federal Register. Ask your CDC for the current figure, because it can change.
Sources: U.S. Small Business Administration, "504 loans" page (archived February 22, 2025); 13 CFR 120.861, "Job creation or retention," eCFR, January 31, 2025.
When the owner must put in more than 10 percent
Ten percent is the floor, not a promise. The federal code sets higher amounts in some cases. A business that has operated for two years or less must put in at least 15 percent. So must a project that builds or expands a limited-use or single-purpose building. When both conditions apply, the minimum is 20 percent.
The money can come from your own cash, from land that is part of the project, or from another source. It cannot come from an SBA business loan program, with one narrow exception for certain investment companies.
Plan for this early. On a $2 million project, 10 percent is $200,000, but 20 percent is $400,000. The gap changes whether the deal works.
Sources: 13 CFR 120.910, "Borrower contributions," eCFR, January 31, 2025.
Rates, terms and fees
SBA lists 10-, 20- and 25-year terms for the CDC loan. The interest rate is set a small step above the current market rate for 10-year U.S. Treasury issues. The rate is fixed for the life of the loan.
The bank's loan has its own terms. The federal code requires it to run at least 7 years when the CDC loan runs 10 years, and at least 10 years when the CDC loan runs 20 years. Its rate must be reasonable and cannot top a ceiling SBA publishes. The bank cannot call the loan early unless you are in default.
SBA says program fees total about 3 percent of the debt. They may be financed with the loan, so they do not need to come out of pocket on closing day.
Sources: U.S. Small Business Administration, "504 loans" page (archived February 22, 2025); 13 CFR 120.921, "Terms of Third Party loans," eCFR, January 31, 2025.
How to start
SBA says 504 loans are available only through CDCs. They are nonprofit, community-based partners that SBA certifies and regulates. A CDC serves the area where your project is located. Start there rather than with a bank, because the CDC knows the program rules and can help line up the first-lien lender.
Before your first call, gather three things. Write a short business plan. Collect two years of financial statements. Get a rough project budget with quotes for the building or equipment. Then ask the CDC four questions. Which of my costs are eligible? What will my down payment be? How many jobs must the project support? Which banks do you work with?
Comparing two CDCs and two banks is cheap and useful. Rates, fees and speed can differ even when the program rules are the same.
Sources: U.S. Small Business Administration, "504 loans" page (archived February 22, 2025); 13 CFR 120.801, eCFR, January 31, 2025.
Sources
- U.S. Small Business Administration, "504 loans," sba.gov/funding-programs/loans/504-loans (Internet Archive copy, February 22, 2025).
- Electronic Code of Federal Regulations, Title 13, Part 120, Subpart H, Development Company Loan Program (504), sections 120.801, 120.861, 120.910 and 120.921 (version of January 31, 2025).