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SBA 504: A Quick Guide for Lenders

by John Reichard on Tuesday, February 21, 2017 1:00 PM

When it comes to SBA financing for small to medium sized businesses, most lenders are at least a little familiar with the SBA 7a guaranty program.  However, most are not familiar with the SBA 504 loan program.  Not having knowledge of this beneficial loan program puts your lending institution and your borrower at a disadvantage in terms of options for structuring a financing package.

For those who are not very familiar with the SBA 504 loan program, here is a quick guide to what the loan program is and how it may benefit your lending institution and borrower.  While there are certainly more details about the loan in terms of what it can or cannot do, this quick guide should help you and your borrower decide if the 504 loan might be worth exploring in more detail.

The SBA 504 program provides financing for the acquisition/construction of fixed assets.  This means the purchase of new or used equipment, the acquisition of existing real estate, ground-up building construction, and renovations to existing real estate.  Refinancing of existing term debt, either alone or combined with new financing, may also qualify.

Businesses that could qualify for a 504 loan include:

  •      For-profit businesses involved in manufacturing, service, retail, or agriculture
  •      For real estate projects, borrower must be primary occupant of the property
  •      Borrower and affiliated businesses must have a net worth less than $15 million and net income less than $5 million
  •      Eligible financing need of at least $350,000 and as much as $12 million or more

When discussing the potential option of an SBA 504 loan with your borrower, here are the basic “talking points” of the benefits that they might get by choosing a 504 loan as part of their financing:

  •      Finance up to 40% of their need and up to $5 million
  •      Long term – 20 years for real estate and 10 years for equipment
  •      Fixed rate – Interest rate is fixed for the life of the loan
  •      Less money down – as low as 10%
  •      Competitive rate vs conventional financing
  •      Generally a lower cost option to SBA 7a financing
  •      The addition of a 504 loan in a subordinate position makes the primary lender’s loan less risky

Certified Development Companies (CDCs) are your main source of information and contact for SBA 504 loans.  Once you think you may have a financing need that could benefit from a 504 loan, reach out to a CDC and they will help you determine whether or not it would qualify.  For lenders in Pennsylvania, SEDA-COG Local Development Corporation has been making SBA 504 loans for over 30 years and can quickly assess the potential of a 504 loan.

John Reichard

Information related to the SBA 504 loan program for small businesses.