SBA 504 Loan Program Overview

The SBA 504 loan program was created through the Small Business Investment Act of 1958. Through the program, small businesses are able to secure government guaranteed financing for the purchase or refinancing of owner-occupied commercial real estate and/or equipment. These loans can also finance ground up construction or the expansion of commercial real estate.

To secure the SBA guarantee, Community Development Companies (CDCs) work with the SBA for approval, closing, funding, and servicing. The borrower is left with two loans, the first serviced by their lender, and the second serviced by their CDC.

How it works

  • Lending institutions provides a conventional loan for 50% of the project costs

  • The SBA guarantees the second loan which makes up 40% of the project costs

  • Borrower comes with 10% down toward the project costs

The 50/40/10 loan structure is the most commonly used, but there are exceptions depending on the type of property being purchased and the financials of the borrowing business.

Benefits of the Program

To the Borrower

  • As little as 10% down on total project costs, which can include soft costs and closing costs

  • The rates on the 504 loan are fixed for up to 25 years and are usually below conventional market rates

  • Fees on 504 loans are typically lower than other SBA guarantee options

  • There is no limit to the total project cost, which is not the case with other SBA guarantee options

  • No additional collateral required

To the Lender

  • A 50% LTV may allow lenders to fund loan requests that otherwise would not fit within their credit criteria

  • Blending the lender’s rate with the 504 25 year fixed rate can help lenders compete out in the market

  • 504 loans can refinance existing borrower’s loans to keep banking relationships

    • Cash out can be provided when available equity is sufficient

    • Can be used to refinance existing 7(a) and 504 loans

  • Lenders are effectively left with a conventional loan with first position secured interest once the 504 portion has funded, allowing lenders to manage/service the loan as they would the rest of their conventional portfolio

  • Allows lenders to tap into the growing demand of the 504 program by informed borrowers out in the market