Small business owners looking for financing have probably come across the United States Small Business Administration or SBA. If not, SBA loans are well worth looking into. They’re often a secondary stop after being turned down by a bank or private lender. There are two reasons this is the case: SBA loans are easier to get and, to be eligible, borrowers need to have exhausted other financing options. SBA loans are a valuable tool growing businesses can utilize through much of their launch, growth and development lifecycle, but with the more common 7(a) program taking much of the limelight, not all businesses are aware of how they might benefit from an SBA 504 program. This article explains what the SBA 504 loan is all about.

What is the SBA 504 Loan?

The SBA 504 is a commercial loan for small businesses. The loan exists to help small businesses invest in major fixed assets. It’s used to cover expenses like purchasing real estate, buying equipment, taking over another business, and building commercial property. The 504 has a variable rate based on the Prime Rate set by the Federal Reserve.

This loan has several benefits over other commercial loans. First of all, it’s easier to get. You don’t need a high credit score to qualify and your business doesn’t need billions in revenue. Secondly, the SBA 504 is more affordable. Borrowers save money on down payments, monthly costs, and interest. In contrast to most loans that require a 20-30% down payment, the SBA’s minimum is 10%. Loan terms are longer – up to 25 years – which reduces the borrower’s monthly payment. Since the interest rate is restricted to a few points above Prime, lenders can’t charge sky-high rates on the loan.

Where potential borrowers tend to get confused is the structure of the SBA 504 loan. Funding comes from three sources but involves four parties. The three funding sources are the borrower’s down payment, a CDC, and a first lienholder. The SBA comes in as a guarantor on the CDC’s portion of the loan. The down payment portion is fairly self-explanatory (ask a broker if you have questions). We’ll get into the other two down below.

Certified Development Companies

CDCs are non-profit businesses with three primary objectives: community development, public policy, and energy reduction. They achieve these goals when they facilitate loans for small businesses. They do this by packaging debt and selling it to private investors looking for low-risk, fixed income streams.

CDCs provide 40% of the total loan and the SBA reduces risk to lenders by guaranteeing this portion with federal funds. This acts as a second mortgage on the property. The SBA does not do direct loans for the 504 program. If you want an SBA 504 loan, your broker will with with you, a CDC and a direct, private lender. Your broker and the CDC assemble the pieces of the loan and match your project with a lender for the second portion of the loan.

First Lienholder

Half of an SBA 504 loan is provided by the first lienholder on the loan. This lender pitches in 50% of the total cost. Often, this lienholder is a bank. Since they’re the first lienholder, they get paid back first in the case of default. That lowers the risk to the bank and makes them more willing to lend. This lender will review the loan application in addition to the SBA and the CDC.

At this point, it might seem like the SBA 504 loan is more about protecting the lender than the small business. However, lenders make their decisions based on risk. The more a loan presents a risk to lenders, the harder it will be for borrowers to get the loan. By providing incentives to lenders that reduce risk, the SBA and CDC make those lenders open to more borrowers, and reduce interest rates.

More About the SBA

SBA 504 loans help the SBA in its goals of preserving free enterprise, protecting small businesses, and strengthening the nation’s economy. Small businesses are so important because they make up 99.9% of all businesses in the United States. Without them, the national economy would be devastated.

A major part of the SBA’s objective is job creation. When reviewing CDC loan documents, the Administration expects at least 15 full-time employees for every $1M in loans. But the need for new jobs and the opportunity for women, veterans, and minorities varies by region. That’s part of the reason CDCs exist. They operate locally to understand the needs of their neighborhoods.

What exactly is a small business, according to the SBA? By the Administration’s definition, a small business has a net worth of $15M or less and earns $5M or less in annual net income. Broadly speaking, businesses with less than 500 employees are “small” but that number varies by industry. To determine if your business is included visit the size standard tables to determine if your business qualifies, or connect with one of our brokers who can facilitate the process.

How to Qualify for SBA 504

Although qualifications will vary depending on your purpose for the loan (real estate, equipment, construction, etc.) and CDC objectives in your local area, here are some overall eligibility requirements you can use as a starting point. You can always speak with a broker to hone in on the details.

  • Collect your financial documents for the past two years. Your company needs to have made an average of $5M or less during those years to be eligible.
  • If you’re looking to buy real estate, your company has to use 51% or more of the building’s available space for its own operations. You can’t rent out the entire building to another business, but you can rent out 49% of it.
  • Calculate your DSCR. To qualify for the SBA 504, you’ll need a DSCR of 1.25 or above.
  • Review your credit report to clear up any issues like misreporting or easily-resolved debts. If your score is 675+, you should be good to go.


Throughout this article, you’ll have seen more than one mention of using a broker to help with your SBA 504 loan. That’s because a broker is the single-most useful tool when you’re shopping for a commercial loan. Brokers can give you current interest rates, estimate how long it will take to get approved, and check out your qualifications before you apply. You can save time and money by working with a professional broker.

Our team works with businesses like yours every single day. Our job is to match you with the best financing for your goals based on your business scenario. Let’s connect. We are certain we can help your business access the capital it needs to take the next step on your business journey.