SBA 504 Loan Program

There are a number of lending options for companies looking to secure capital. While some are very common, others are less well-known. The SBA’s 504 loan program is slightly less popular than other options, but it could be the right fit, depending on your capital needs.

An SBA 504 loan is a lending program that offers financing to promote the expansion of business operations or job creation through the purchase or improvement of real estate, equipment, or other fixed assets. These loans are issued and funded through Certified Development Companies (CDCs) that are certified through the SBA, with some of the funding coming from other approved lenders.

504 loans can be obtained in amounts ranging from $250,000 to $12.5 million for qualified projects. The loan is structured so that 50% comes from a private sector bank or credit union and 40% comes from the entity backed by the SBA. Borrowers are generally responsible for a 10% down payment, although special purpose or start-up loans and change of ownership loans may require an additional 5% down payment.

Once the funding is distributed, the company may use the proceeds to finance fixed assets that promote business growth and job creation for activities such as the purchase of machinery or other equipment, buildings, land, or new facilities. Similarly, borrowers can also use the funds to improve or upgrade existing facilities, land, streets, utilities, parking lots, and landscaping. 

Businesses must meet the following requirements to qualify for a 504 loan:

• Have a tangible net worth of less than $15 million.
• Report an average net income of less than $5 million for the previous two years.
• Demonstrate qualified management experience.
• Have a feasible and realistic business plan.
• Demonstrate a willingness to repay debt and comply with applicable laws.
• Show the ability to repay the loan.

Some companies, such as those engaged in nonprofit, passive, or speculative activities, are ineligible for 504 loan funding.

The 504 loan program was permanently changed in 2015 to authorize the program to be used for debt refinancing in any year that the program is at zero subsidy. To be eligible for the refinance program under 504 loans, the project must:

• Include a company that has been operating for at least two years.
• The debt must be refinanced from a commercial loan that was incurred for the benefit of the small business not less than two years before the date of the 504 loan application, have been used to acquire a 504 eligible fixed asset, be secured by the 504 fixed assets, and have a borrower that is current on all payments for at least the previous twelve months prior to the application.

With 504 refinancing, existing projects and government-guaranteed loans are not eligible to be refinanced. Additionally, all traditional 504 Loan Program regulations apply to the 504 Debt Refinance Program.

This type of lending may be a good fit for your business’s needs. To learn more about 504 loans, requirements, and eligibility, contact Penn Commercial Capital today!