SBA 504

Last Updated: 03/24/2024

Loan Highlights

SBA 504 Loans offer attractive financing options for small businesses, providing long-term, fixed-rate financing for major fixed assets with favorable terms and lower down payment requirements.
Suitable for borrowers seeking to purchase, construct, or renovate owner-occupied commercial properties while preserving working capital and mitigating interest rate risk.
Very competitive and below-market interest rates compared to other commercial loan products
Works great for businesses that file taxes correctly. Can also be for business acquisition only without real estate.
Owner-occupied properties include but not limited to industrial facilities, office buildings, retail centers, or manufacturing plants.
Refinancing of large equipment and/or owner-occupied commercial real estate may also be possible.
Ranges from $500,000 to $5.5 million, with the average loan size around $1 million, depending on project costs, borrower qualifications, and SBA guidelines.

10 years Treasury Bond + 4.5% margin for first loan and typically 3% margin for second loan

*The interest rate calculation above is estimated.

There’s 2 loans in an SBA financing:
- A private institution lender at 1st position covering up to 40% LTV as conventional first mortgage. Usually a bank or credit union.
- A government-backed lender (aka. SBA lender or CDC) at 2nd position covering up to 50% LTV.
Interest rates: Different rates and terms for the two lenders. Usually fixed rate on both loans.
Typically no balloon and amortized over 10, 20, 25 or 30 years. 10-20 years for equipment and business-only acquisition.
Capped at 90% LTV – real estate acquisitions.
Capped at 80% LTV for equipment purchases.
A seller’s note can be an alternative to the down payment (premium).
5 years prepayment penalty for the 1st position loan, 10 years for the subordinating loan. The penalty amount starts at 5 points in the first year for both loans.
Fees include a one-time SBA guarantee fee, typically around 3% of the SBA debenture amount, and closing costs.

FICO: 680+ (loan guarantor)
History: No Bk or foreclosure
Minimum DSCR – 1.25
Eligible businesses: Small businesses operating for profit and located in the United States, including sole proprietorships, partnerships, corporations, and limited liability companies (LLCs).
Project eligibility: Projects must involve the purchase, construction, or renovation of owner-occupied commercial real estate or the acquisition of long-term machinery or equipment.
Borrower equity: Borrowers must provide at least 10% equity injection for real estate projects or 15%-20% for startups or special-use properties, with the SBA providing up to 40% of the project costs through a subordinate loan.
Collateral: The property being financed serves as collateral for the loan, with personal guarantees from business owners required for the SBA portion of the loan (can be personal assets).
Documentation:
- Typical Documents: Full docs. The lender will look at the 3 C’s: Cash flow, Credit Score, and Collaterals, including business financial statements, tax returns, business plans, business P&L of last 12 months, 3 months banks statements, personal financial statements, property appraisals, and legal documents.
- Debts schedule is required to show all the debts tied with the business and the guarantor
- Borrowers may also need to provide evidence of available equity, project plans, environmental assessments, and other documentation as required by the SBA and participating lender.

SBA 7(a) Loan: Offers flexible financing options for various business purposes, including working capital, real estate acquisitions, equipment purchases, and business expansion, with the SBA providing a government guarantee on a portion of the loan amount.
SBA Express Loan: Provides expedited processing for smaller loan amounts, up to $350,000, with reduced paperwork requirements and faster approval times compared to traditional SBA 7(a) loans.

SBA 504 Loans (acting as subordinating loan at 2nd position) are funded by private lenders, certified development companies (CDCs), and sponsored Small Business Administration (SBA), with lending decisions based on project feasibility, borrower qualifications, and SBA guidelines.
First mortgage lender is usually banks or credit unions.

Common misunderstandings with SBA 504 Loans include:
- Limited use of funds: SBA 504 loans are designed specifically for financing owner-occupied commercial real estate or long-term machinery and equipment purchases. Borrowers should ensure that their project meets the SBA's eligibility criteria and is suitable for 504 financing before applying.
- Longer processing times: While SBA 504 loans offer attractive terms and government guarantees, the approval process may take longer compared to traditional bank loans due to the extensive documentation and underwriting requirements. Borrowers should plan accordingly and work closely with their CDC and lender to expedite the process where possible.
- Importance of project planning: SBA 504 loans require a detailed project plan outlining the borrower's use of funds, construction or renovation plans, environmental assessments, and other project details. Borrowers should invest time and resources in developing a comprehensive project plan to demonstrate the viability of the project and increase their chances of approval.