Business Loans
SBA 504 Loans: What it is and How to Apply
Many small businesses reach a point where growth requires larger investments, purchasing commercial property, building a new facility, or upgrading to long-term equipment.
- Dileep K Nair
- July 9, 2025
Table of Contents
Many small businesses reach a point where growth requires larger investments, purchasing commercial property, building a new facility, or upgrading to long-term equipment. These investments are capital-intensive, and traditional loans may not offer the repayment terms or flexibility that small businesses need.
The SBA 504 loan program is designed for exactly these situations. Backed by the U.S. Small Business Administration, the 504 loan helps small businesses finance major fixed assets at low interest rates and with long-term repayment schedules.
This guide explains what SBA CDC/504 loans are, how they work, what they can be used for, and how to apply.
What Is an SBA 504 Loan?
An SBA 504 loan is a government-backed loan used for purchasing or improving fixed assets. These include land, buildings, and heavy equipment. Unlike other SBA loans, the CDC/504 program is structured through a partnership between three parties:
- A Certified Development Company (CDC)– a nonprofit corporation authorized by the SBA to promote economic development in local communities.
- A Conventional Lender– usually a bank or credit union that provides a portion of the loan.
- The Borrower– the small business that applies for the loan.
The funding is typically split in the following way:
- 50% from a conventional lender
- 40% from a CDC backed by the SBA
- 10% equity from the borrower
This structure spreads the risk and makes it possible for businesses to access large sums of capital with lower down payments and stable long-term rates.
What Makes SBA 504 Loans Unique?
The SBA 504 loan stands out for a few key reasons:
- It offers long-term, fixed-rate financingat below-market interest rates.
- It is strictly limited to fixed asset purchases, not working capital or inventory.
- The borrower’s equity requirement is generally low, often just 10%.
- The program supports economic development, so businesses must create or retain jobs, or meet other public policy goals.
Unlike SBA 7(a) loans, which are broad in use, the 504 loan is focused and targeted at building long-term value.
What SBA 504 Loans Can Be Used For
SBA 504 loans are intended for long-term investments in tangible assets. Approved uses include:
- Purchasing land or existing buildings
- Constructing new facilities
- Renovating or modernizing existing buildings
- Buying long-term equipment or machinery
- Improving land (landscaping, grading, utility installation)
- Refinancing qualified existing debt tied to fixed assets
These funds must be used for assets that will be used in the business. Passive real estate investments or residential properties do not qualify.
What SBA 504 Loans Cannot Be Used For
There are clear restrictions on how 504 loan funds may be used. Prohibited uses include:
- Working capital
- Inventory purchases
- Consolidating or refinancing unsecured debt
- Funding salaries or daily operations
- Speculative real estate or rental property
- Investments not directly tied to business use
Understanding these restrictions is important when planning your loan application. Misuse of funds may lead to disqualification or loan recall.
Who Can Apply for an SBA 504 Loan?
The SBA 504 loan is available to for-profit businesses operating in the United States. To qualify, your business must meet the following criteria:
- Operate as a for-profit company
- Fall within the SBA’s small business size standards
- Have a net worth below $15 million
- Have an average net income after taxes of less than $5 millionfor the past two years
- Show the ability to repay the loan from operating cash flow
- Meet a public policy goal, such as job creation, energy efficiency, or supporting manufacturing
- Occupy at least 51% of the building(if purchasing an existing property), or 60% (if constructing new)
Certain business types, such as nonprofit organizations, lenders, or speculative investment companies, are not eligible.
SBA 504 Loan Amounts and Terms
💰 Maximum Loan Amounts
The SBA 504 loan can finance large projects. The total project size is often greater than the SBA portion, since the loan is only part of the funding.
- CDC Portion (SBA-backed): Up to $5 million
- For manufacturing or energy-efficient projects: Up to $5.5 million per project (and up to $16.5 million total for multiple projects)
This allows small businesses to fund large-scale improvements with reasonable capital outlays.
📅 Repayment Terms
- 10-year term: Typically used for machinery or equipment
- 20- or 25-year term: Used for real estate or building construction
The fixed rate applies for the full term, making it easier to forecast monthly costs.
📈 Interest Rates
Interest rates on the CDC (SBA-backed) portion are based on U.S. Treasury bond rates, plus fees. They are fixed for the life of the loan. Rates for 2024 have generally ranged between 5.5% and 6.5%, depending on the market.
The rate on the lender’s 50% portion is negotiated between the borrower and the bank. It may be fixed or variable.
SBA 504 Loan Structure Example
Let’s look at a $1 million project to buy and renovate a commercial building:
- $500,000– Bank loan (first lien)
- $400,000– CDC/SBA loan (second lien)
- $100,000– Borrower equity (10%)
This structure helps the borrower limit upfront costs while securing ownership of a long-term business asset.
SBA 504 Loan Fees
While the interest rate is favorable, there are a few one-time and ongoing fees to be aware of:
| Fee Type | Amount |
| SBA guarantee fee | Included in loan rate |
| CDC processing fee | Up to 1.5% of SBA portion |
| SBA servicing fee | ~0.25% annually (built into interest rate) |
| Third-party lender fee | Negotiated with the lender |
| Closing costs | Appraisals, title, legal, environmental |
Most of these fees are financed as part of the total loan, reducing the need for out-of-pocket payment.
What are the Pros and Cons of SBA 504 Loans
Benefits
✅ Low Down Payment
Borrowers typically need to contribute just 10% of the total project cost. For businesses with limited capital, this allows access to major investments without depleting cash reserves.
✅ Fixed Interest Rates
The SBA-backed portion offers a fixed rate for 10, 20, or 25 years. This stability is valuable in rising rate environments.
✅ Longer Repayment Periods
Extended terms lower monthly payments and help maintain business cash flow. Businesses can manage debt while investing in growth.
✅ Larger Loan Amounts
504 loans support larger capital needs than most traditional small business loans. Manufacturing and green energy projects can exceed $16 million in total financing.
✅ Support for Economic Growth
The program is designed to promote job creation, environmental sustainability, and regional development. Borrowers align with public policy while growing their business.
Drawbacks to Consider
❌ Use Limitations
Funds can only be used for specific asset-based purposes. Businesses needing working capital or general expense support should consider 7(a) loans or other options.
❌ Job Creation Requirement
Borrowers must create or retain one job for every $75,000 borrowed, or meet a public policy goal. Not all businesses can meet these targets.
❌ Complex Application Process
504 loans involve two separate lenders (bank + CDC), multiple approvals, and detailed documentation. This increases application time and administrative requirements.
❌ Collateral Required
The loan is secured by the asset being financed. In some cases, personal guarantees or additional collateral may also be requested.
How to Apply for an SBA 504 Loan
🔍 Step 1: Find a CDC Partner
You must work with a Certified Development Company. These nonprofit lenders are certified by the SBA and operate in all 50 states. Use the SBA’s CDC locator tool to find one in your area.
🏦 Step 2: Identify a Lender
In addition to the CDC, you will need to work with a conventional bank or financial institution. Some CDCs can help match you with a lender. Others may require you to bring your own.
📑 Step 3: Prepare Your Documentation
Have the following documents ready:
- Business plan
- Personal and business tax returns (last 2–3 years)
- Interim financial statements
- Equipment or real estate purchase agreements
- Environmental reports (for real estate)
- Resume of key business owners
- Debt schedule
- Corporate formation documents
- Owner equity proof
🧾 Step 4: Submit Your Application
Once your documents are reviewed and approved, your bank and CDC will submit the application to the SBA. Processing may take 30–90 days, depending on project complexity.
Is an SBA 504 Loan Right for You?
Choose this loan if:
- You are buying, building, or renovating business property
- You need to acquire heavy equipment with a long useful life
- You can meet the job creation or public policy requirements
- You are seeking fixed, long-term financing with a low down payment
If your business needs working capital or flexible usage of funds, an SBA 7(a) loan may be a better fit.
Conclusion
The SBA 504 loan is a powerful tool for businesses ready to invest in long-term growth. With low down payments, fixed rates, and extended terms, it provides access to funding that can transform operations and increase capacity.
It is not the fastest or simplest loan to apply for, but for businesses with capital projects in mind, the benefits can be significant.
If you’re planning to acquire property, build new facilities, or upgrade your infrastructure, consider connecting with a local CDC to explore your eligibility and begin the process.
Frequently Asked Questions (FAQs)- SBA 504 Loans
An SBA 504 loan is designed to help small businesses finance major fixed assets. These include real estate, land, buildings, and large equipment. The goal is to support business expansion and job creation through long-term investments.
The SBA-backed portion of the loan can go up to $5 million, or $5.5 million for energy-efficient or manufacturing projects. Since this is only part of the total funding, full project sizes can often exceed $10 million, depending on the lender and borrower contribution.
Interest rates on the SBA-backed portion are fixed and based on U.S. Treasury bond rates. They typically range between 5.5% and 6.5% depending on the market. The rate on the lender’s portion may be fixed or variable and is negotiated separately.
SBA 504 loans can be used to:
- Purchase land or buildings
- Construct new facilities
- Renovate or expand existing property
- Buy long-term machinery or equipment
- Improve land (utilities, grading, landscaping)
- Refinance eligible fixed-asset-related debt
You cannot use 504 loan funds for working capital, inventory, marketing, payroll, or general operating expenses. It also cannot be used for residential or investment property not used by the business.
To qualify, you must:
- Operate a for-profit business in the U.S.
- Meet SBA size standards for small businesses
- Have a net worth below $15 million
- Show average net income of less than $5 million (after taxes)
- Use the loan to create jobs or meet other public policy goals
- Occupy at least 51% of the building (60% for new construction)
The loan is divided among three parties:
- 50% from a conventional lender (first lien)
- 40% from a Certified Development Company (CDC), backed by the SBA (second lien)
- 10% equity contribution from the borrower
In some cases, the borrower may need to contribute 15% or 20%, such as for startups or single-purpose buildings.
Repayment terms depend on what the loan is used for:
- 10 yearsfor machinery or equipment
- 20 or 25 yearsfor real estate
The SBA portion always has a fixed rate and term. The lender’s portion may differ.
Fees are typically built into the loan amount. They include:
- SBA guarantee and servicing fees
- CDC processing fees (up to 1.5%)
- Bank-related fees (varies)
- Legal, appraisal, and environmental costs
Even with these costs, 504 loans are generally more affordable than commercial real estate loans from private lenders.
Yes. Most borrowers must create or retain one job for every $75,000 borrowed. However, there are exceptions. If your project supports public policy goals such as energy efficiency, rural development, or minority ownership, this requirement may be waived or adjusted.
Approval times vary based on the complexity of the project and the responsiveness of the borrower. On average, it takes 45 to 90 days from application to disbursement. Working with experienced lenders and CDCs can speed up the process.
A CDC is a nonprofit organization certified by the SBA to administer 504 loans. CDCs work with banks and borrowers to structure and submit loan applications. They are responsible for the SBA-backed portion of the loan and play a key role in project approval.
Yes, under certain conditions. The existing loan must have been used to finance fixed assets like real estate or equipment. The refinancing must also provide a tangible benefit, such as a lower interest rate or longer repayment term.
Yes. Some businesses use the 504 loan for fixed assets and the 7(a) loan for working capital or other operating expenses. However, you must qualify for each loan separately and show that the funds are not being used for the same purpose.
Start by finding a Certified Development Company in your state using the SBA’s CDC locator tool. You can also ask your local bank if they work with CDCs and offer SBA 504 loans.
