The Small Business Administration's
"504" Commercial Real Estate Loan Program

The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. These loans are funded by a Certified Development Company, which is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses.

A “504 project” includes a loan secured with a first loan from a lender covering up to 50% of the project cost, a loan secured with a junior lien from the CDC (100% SBA-guaranteed) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business.

Maximum SBA Loan - The maximum SBA loan, called a “debenture,” is $1,500,000 when meeting the job creation criteria or a community development goal, but it is $2,000,000 when meeting a “public policy” goal. Most SBA loans qualify for the public policy goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal (see below).

The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has: Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and all of its production facilities are located in the United States.

Use of Funds - Proceeds from 504 loans must be used for fixed asset projects such as: Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt. It may be used to refinance if it for expanding the current business.

Terms, Interest rates and Fees - Interest rates on 504 loans are set above the market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately three (3) percent of the debenture and may be financed with the loan, although they are currently waived.

Collateral - Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

Eligible Businesses - The business qualifies as small if it does not have a tangible net worth in excess of $8.5 million and does not have an average net income in excess of $3 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

Advantages - There are number of advantages to an SBA 504 loan, including longer terms, no points and no balloon payments.