Small business owners can obtain financing for their businesses and create jobs through the SBA 504 loan program. The program provides an avenue for businesses to gain access to capital while promoting growth and job creation.

A loan may be able to offer you the funding you need for your business. Learn how startups and small businesses can benefit from SBA 504 loans.

What is the SBA 504 Loan Program?

Small businesses can apply for a 504 loan through the Small Business Administration to purchase fixed assets or upgrade existing assets. Certified Development Companies (CDCs) offer these loans, which are nonprofit organizations that promote and foster economic growth within local communities.

504 loans are designed specifically with smaller businesses in mind, so their terms are generally favorable.

How is the SBA 504 Loan Funded?

In order to understand the 504 loan program, it is important to understand the CDC that issues the loan. Certified Development Companies (CDCs) are nonprofit organizations that promote economic growth in their communities.

CDCs play an important role in the loan process, along with the bank that provides some of the financing. To become a CDC, a company must be certified and regulated by the SBA, which ensures quality control.

Small businesses and startups can gain stability and grow with the help of CDCs, which helps the surrounding community grow economically. 

Types of Businesses That Are the Perfect Candidates for the SBA 504 Loan

The CDC SBA 504 Loan can be used for purchasing property and equipment to start or improve a small business and is one of the lowest risk options for business owners which makes it perfect for bringing small business ideas to life! 

Many people started their own small business at home during the pandemic and others decided to quit their 9 to 5 to pursue their small business ideas and work for themselves. While starting your own business can be fulfilling, generating the funds to start the business can be a big hurdle for many people. However, the SBA 504 loan can be a very useful and financially sound tool for people who want to start their own businesses.

So, what kinds of businesses can benefit from the loan and can you start a business with a 504 loan?

Food trucks, bakeries, food services, photography, child care centers, retail, and property management are some of the many popular small businesses that became popular during the covid-19 pandemic. Most of these businesses require equipment to start and many also require property; however, most people do not have the capital on hand to finance these purchases and bank loans can be hard to qualify for and pay off.

Small businesses and startups that only need equipment, such as landscaping, catering, cleaning companies, or businesses that already have offices, can benefit from smaller sized loans that still have all the benefits of a CDC loan compared to a bank loan for the same amount and purposes. Small businesses that need to purchase property also greatly benefit from the 504 loan, compared to bank loans, even if they need much larger loan amounts.

These types of small businesses are perfect candidates for the CDC SBA 504 loan. With loans up to $5 million, 10, 20, & 25 year maturity periods, and only a 10% down payment required by the loanee, utilizing the SBA’s 504 loan is a cost-effective and smart way to get the funding you need.

For people who are interested in becoming property managers, the SBA 504 loan cannot be used for rental real estate (apartments and Airbnb properties). If the loan is used to purchase a building, your business must occupy at least 51% of the space and for ground-up construction, your business must occupy 60% of the building in the short-term and 80% in the long-term.

What Businesses Can’t Use the SBA 504 Loan?

  • Charitable, religious, and government nonprofits
  • Firms that invest in real estate
  • Companies that engage in speculative activities
  • Rare coin and stamp dealers
  • Lending firms
  • Companies involved in pyramid sales
  • Passive businesses
  • Membership-restricted clubs and businesses
  • Organizations that promote religion as their primary activity
  • Organizations that primarily engage in political activities

Are You Eligible for the SBA 504 Loan?

The SBA requires the following criteria for businesses seeking 504 loans:

  • Be a for-profit company in the United States or its possessions
  • A tangible net worth below $15 million
  • During the two years preceding your application, have never earned more than $5 million after federal income taxes
  • Among the other criteria for eligibility are meeting SBA size guidelines, demonstrating qualified management skills, submitting a feasible business plan, and having good character.

Top Uses of SBA 504 Loans

  • Establish new locations. 

The 504 offers the benefit of purchase-renovation. Borrowers can use the loan to purchase existing buildings and make improvements to them. Purchasing a building that doesn’t quite function in its current state and remodeling it with the same money can be a good way to expand your business.

  • Become environmentally friendly. 

Consider energy efficiency when remodeling an existing building. With the Grow (504) Loan Program, SBA is offering up to $5 million in additional second mortgage funds for environmentally friendly projects. Pre-existing SBA loans are not affected by this financing. So, by saving on utility bills, you’ll have more money to spend on building.

  • Invest in equipment. 

A comprehensive 504 project will cover all removal, transport, and installation costs. It is important to note that machinery and equipment used in the project should have a lifespan of at least 10 years. Commercial printers, radiography machines, dry cleaning equipment, and equipment that generates renewable energy are examples of such equipment.

  • Refinance your existing debt. 

For commercial real estate and fixed-asset projects, a 504 refinance loan works in conjunction with a bank loan. Using this program, available through SBA CDC lender 504 Capital Corporation, you can refinance at a fixed, below-market rate. You can take out up to 20% of the property’s value as working capital with the loan.

Have Questions or Want to Know More? Contact Us!

Please reach out to one of our loan experts if you would like to learn more about the SBA 504 loan program or to see if you are eligible. You can also download the application documents to get started on your loan application. Visit BFCfunding.com for more information.